Melrose PLC · 90 Independent auditors’ report – Company statements 91 Company Balance Sheet...

Melrose P

LC A

nnual Report 2009

Melrose PLCAnnual Report 2009

Making acquisitionsDriving performanceRealising value

www.melroseplc.net

Melrose PLC Annual Report 2009

Contents

01 Financial highlights02 Group at a glance06 Chairman’s statement08 Chief Executive’s review 10 Energy business review 12 Lifting business review 14 Dynacast business review 16 Other Industrial business review19 Finance Director’s review26 Board of Directors28 Directors’ report

36 Corporate Governance report40 Remuneration report44 Statement of Directors’

responsibilities

45 Financial contents46 Independent auditors’ report –

consolidated statements47 Consolidated Income Statement48 Consolidated Statement

of Comprehensive Income49 Consolidated Statement

of Cash Flows50 Consolidated Balance Sheet51 Consolidated Statement of Changes

in Equity52 Notes to the accounts90 Independent auditors’ report –

Company statements91 Company Balance Sheet for

Melrose PLC92 Notes to the Company

Balance Sheet

99 Notice of Annual General Meeting103Company and shareholder

information

Businessperformance

Governance

Shareholderinformation

Financials

£1,298.5mRevenue(Year ended 31 December 2009)

16.6pHeadline(1)basicearningspershare(Year ended 31 December 2009)

£149.7mHeadline(1)operatingprofit(Year ended 31 December 2009)

Revenuebygeographiclocation(%)

1Europe 60%2NorthAmerica 31%3Asia 7%4Restofworld 2%

Netdebt(£m)

All information presented above relates to the Group’s continuing business.

(1) Before exceptional costs, exceptional income and intangible asset amortisation.

(2) The ratio of net debt to headline operating profit before depreciation and amortisation.

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2.65x 2.13x 1.76xLeverage(2)

Designed and produced by Merchantwww.merchant.co.ukPrinted by St Ives Westerham Press


01Melrose PLCAnnual Report 2009

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Financial highlights

Melrose’s strategy is to acquire businesses it understands, improve them by a mixture of investment and changed management focus and, in a three to five year time frame, realise the value created and return it to shareholders in the most efficient way possible.

Headline(2) 2009 profit before tax of £118.6 million (2008: £73.1 million)(3)

Headline(2) 2009 earnings per share of 16.6p (2008: 16.1p)(3)

Basic earnings per share after exceptional items and intangible asset amortisation of 11.0p (2008: 4.1p)(3)

Profit before tax of £82.0 million (2008: £23.5 million)(3)

Headline(2) operating profit margins in the second half of 2009 of 13%

Excellent cash generation, at constant exchange rates net working capital reduced by £148.3 million (over half) since FKI acquisition

Net debt of £321.7 million (2008: £543.1 million) reduced by £221.4 million. Net debt is now 1.76 x EBITDA(4)

Proposed second interim dividend of 4.8p per share (2008: final dividend of 4.25p) payable on 1 April 2010 to shareholders on the register on 19 March 2010 in lieu of the final dividend for this year. Together with the previous interim dividend of 2.9p (2008: 2.75p), this gives a full year dividend of 7.7p (2008: 7.0p), up 10.0%

(1) Continuing operations only unless otherwise stated. (2) Before exceptional costs, exceptional income and intangible asset amortisation. (3) Restated to include Logistex Europe (sold on 28 August 2009) within

discontinued operations. (4) Headline operating profit before depreciation and amortisation.

How we performed Financial highlights(1)

“ Our first full year of ownership of FKI has exceeded our expectations, with margin improvements, debt reduction and cash generation being the highlights. In a very difficult year these results illustrate the quality of our businesses.

Across the Group, sales in our early cycle businesses are now beginning to increase and in our later cycle businesses order books are reviving. For the moment it appears recovery, which has been noticeable for several months in the East, may be on the way to the West.

We continue to believe that market and economic conditions favour acquisitions over disposals at present and so we continue to look for the right opportunity. Fortunately, the strong growth potential of our existing businesses over the next few years gives us the ability to be patient.”

Christopher Miller Chairman

02 Melrose PLC Annual Report 2009

Group at a glance

Business descriptionWorld number one independent supplier of turbogenerators and leading supplier of other electricity generating machinery, transformers and power infrastructure equipment, including aftermarket service capabilities.

Key strengths Expertise to design and manufacture an extensive range of high quality, medium

to high voltage generators.

Comprehensive and integrated aftermarket support to ensure individual packages are tailored to meet customers’ needs and requirements throughout the operating life of their equipment.

Long-standing relationships with UK and overseas electricity supply authorities, global oil companies and deep coal mine companies.

Transformer products in service with all UK energy supply authorities.

Strategically located around the world.

Sectors servedPower generation plants, oil and gas, utilities, industrial, marine, rail, telecommunications, construction, commercial, military and aftermarket.

ProductsPower generation equipment including hydrogen-cooled generators, 4 and 2 pole turbogenerators, combined cooled turbogenerators, synchronous motors, induction motors, submersible and traction motors, power management systems, excitation systems, generator control and protection panels, generator terminal cubicles, medium voltage and transit switchgear, power, system and distribution transformers and aftermarket servicing.

Major customersGeneral Electric, Pratt & Whitney, Rolls-Royce, Scottish & Southern Electricity, EDF, Saudi Aramco, major oil and mining companies and other UK and overseas electricity distribution network operators (“DNOs”).

Energy businesses

Brush Turbogenerators www.brush.euMarelli Motori www.marellimotori.comBrush Transformers www.brushtransformers.comHawker Siddeley Switchgear (HSS) www.hss-ltd.comHarrington Generators www.harrington-international.co.uk

Energy

Winding specialist inserting copper coils into the stator assembly of a Brush electrical turbogenerator

Revenue(Year ended 31 December 2009)

£418.3m

Average number of employees(Year ended 31 December 2009)

3,558

Headline(1) operating profit(Year ended 31 December 2009)

£61.0m

Revenue by geographic location(%)

1 Europe 95%2 NorthAmerica 3%3 Asia 1%4 Restofworld 1%


See page 10 for Energy business review.

1 Utilities 45%2 Aftermarket 16%3 Oilandgas 14%4 Industrials 14% 5 Marine 6%6 Other 5%

Revenue by end market(%)

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£419.0m


2,886


£62.5m


1 NorthAmerica 45% 2 Europe 44%3 Asia 6%4 Restofworld 5%


See page 12 for Lifting business review.

1 Energy 41%2 Industrials 36%3 Mining 10%4 Infrastructure 5%5 Wire 4%6 Marine 4%

Business descriptionTop three supplier worldwide for wire and wire rope and leading supplier worldwide of lifting fittings and blocks and custom engineered material handling products.

Key strengths Comprehensive and competitive range of solutions in steel wire, wire and fibre

rope and strand.

Technical expertise to support customers in demanding applications, training, installation and testing.

World’s leading supplier of accessories used in lifting and material handling applications.

Strategically located around the world.

Sectors servedOnshore and offshore oil and gas, deep shaft and surface mining, petrochemical, alternative energy, general industrial and construction markets, fishing and marine, infrastructure (e.g. bridges and sports stadia) and material handling industries.

ProductsWire rope, fibre rope, wire, lifting hooks, connectors, clamps, hoist rings, blocks, sheaves, material handling products, monorail systems, chain hoists and industrial carts and trailers.

Major customersGlobal crane original equipment manufacturers (“OEMs”), mining OEMs, major oil companies, global oilfield exploration and construction contractors, construction companies and lifting products distributors.

Lifting businesses

Bridonwww.bridon.comCrosbywww.thecrosbygroup.comAccowww.accomhs.com

Lifting

New Kurilpa pedestrian bridge in Brisbane, Australia


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Group at a glancecontinued

Business descriptionGlobal designer and manufacturer of precision engineered die-cast metal components and assemblies.

Key strengths Precision engineered die-cast zinc, aluminium and magnesium alloy components.

Full service capability.

Concept and design engineering.

Rapid prototyping.

Machine building capability.

Sectors servedAutomotive, telecommunications, consumer electronics, computing, healthcare and construction.

ProductsAutomotive components, telecommunications and electronic components, consumer products and die-casting machines.

Major customersProcter & Gamble, Valeo, Autoliv, TRW, Bosch, Apple, Motorola and Sony.

Dynacast businesses

Dynacastwww.dynacast.comFishercastwww.fishercast.co.ukTechmirewww.techmire.com

Optical pick-up component manufactured for Blu-ray players

Dynacast Revenue(Year ended 31 December 2009)

£208.7m


2,141


£21.3m


1 Europe 38%2 NorthAmerica 34%3 Asia 28%


See page 14 for Dynacast business review.


1 Automotive 36%2 Electronicsand

communications 27%3 Healthcare 11% 4 Hardware 8%5 Tooling 5%6 Other 13%

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£252.5m


2,415


£20.6m

1 Europe 44%2 NorthAmerica 55%3 Asia 1%


See page 16 for Other Industrial business review.

1 Hardware 37%2 Rail 13%3 Automotive 9%4 Industrials 9%5 Aftermarket 8%6 Other 24%

Business descriptionTruth US market leader in design and manufacture of residential and

commercial window, storm and screen door hardware.

Harris Market leader in scrap processing, waste reduction and recycling equipment design, engineering, manufacture and servicing.

Brush Designs, manufactures and refurbishes rail locomotives, propulsion Traction systems, coaches and freight vehicles.

MPC Designs and manufactures engineered plastic injection-moulded and extruded components and metal pressings.

Logistex UK Designs and manufactures automated material handling solutions.

Weber US number one designer and manufacturer of high-end concealedKnapp appliance hinge mechanisms, spring loaded mechanisms and custom

electrical enclosures for ergonomic office furniture solutions.

Key strengths Market leading design and engineering capabilities.

In depth aftermarket service supply capabilities.

Leading innovative product development and technology choice for customers.

Trusted long-standing quality brand names.

Sectors servedBusinesses serve a diverse range of sectors, including housing, construction, retail, scrap processing, fibre recycling, rail, automotive, consumer packaging, brewing, food distribution, power tools, industrial, medical, office furniture, storage, distribution and general engineering.

ProductsWindow and door hardware; balers, shears, waste compactors and auto shredders; rail, vehicle and component manufacture and refurbishment; automotive trims and mouldings, food packaging containers and transit trolleys, widgets for bottles and cans and sealing products; ergonomic office and desk equipment; and sortation, distribution and warehouse control systems.

Major customersUS hardware industry OEMs, waste and scrap processors, airports, postal distribution facilities, libraries, manufacturers and distributors in various industries and retailers.

Other Industrial

Eurotunnel shuttle locomotive wheelsets overhauled by Brush Traction

Other Industrial businesses

Truth www.truth.comHarris www.harriswaste.comBrush Traction www.brushtraction.comMPC www.mckechnie-plastics.co.ukLogistex UK www.logistex.comWeber Knapp www.weberknapp.comPrelok www.prelok.comMadico www.madicoinc.com



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Chairman’s statement

I am pleased to report Melrose’s seventh set of annual results since flotation in 2003.

Results for the GroupThese accounts report the results for the Group for the year to 31 December 2009 and comparatives for the previous year. FKI plc was acquired on 1 July 2008 and these accounts include its first full year contribution.

Revenue for the year was £1,298.5 million (2008: £895.3 million). Headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £118.6 million (2008: £73.1 million) and headline basic earnings per share were 16.6p (2008: 16.1p). Profit before tax was £82.0 million (2008: £23.5 million) and the basic earnings per share were 11.0p (2008: 4.1p).

Further explanation of these results is provided in the Finance Director’s review.

FKI plcOur first full year of ownership of FKI has exceeded our expectations. The quality of its major businesses has been demonstrated in their resilience during the severe downturn in 2009. Changes in management and strategies as well as targeted capital expenditure have reaped early rewards. The geographic and sector spread of these businesses when added to their inherent strengths gives us confidence that there is more to come over the next few years. At the same time continued focus by our management teams on permanent cash generation has produced excellent results.

Headline profit before tax

£118.6m

Total 2009 dividend

7.7p

Headline basic EPS

16.6p

“ Our first full year of ownership of FKI has exceeded our expectations. The quality of its major businesses has been demonstrated in their resilience during the severe downturn in 2009.”


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OutlookAcross the Group, sales are now beginning to increase and order books are reviving. For the moment it appears recovery which has been noticeable for several months in the East, may be on the way to the West – although caution must be the watchword until this becomes established. Government debt reduction programmes which need to be carried out in many countries have not yet been implemented and it is very difficult to prejudge the timing and the effects of these.

In the mean time we are confident of the short and long-term prospects of our businesses and satisfied that the actions we have taken in the downturn have left them very well placed for the incipient recovery.

Christopher Miller10 March 2010

2009 was an extraordinarily difficult year. The severe downturn which started in autumn 2008 was the starting point for substantial cost reductions in nearly all our businesses across the world. Our management teams are to be congratulated on their speed of reaction and the accuracy of their targeting. The result can be seen in improved Group profit margins, even in the face of lower sales. Employees too must be thanked for their willingness to embrace sometimes painful change brought on by economic circumstances.

Operational cash generation, always a focus for Melrose, has again been exceptionally strong. At the Group level, after all items including exchange movements and disposals, net debt has been reduced by £221 million to £322 million, an extremely satisfying performance.

Capital expenditure, held back in 2009 in the face of the uncertain outlook, will rise again in 2010. It is also likely that the initial strong improvement in FKI’s net working capital levels will now stabilise as an appropriate level is reached. These two factors will mean that 2010 is more normalised for cash generation although we still fully expect a strong performance at the operating level.

A more detailed review of Melrose’s businesses and financial position is contained in the reviews of the Chief Executive and Finance Director on the following pages.

DividendsThe Board intends to pay a second interim dividend of 4.8p per share (2008: final dividend of 4.25p) on 1 April 2010 to shareholders on the register on 19 March 2010 in lieu of a final dividend. This gives a total for the year of 7.7p (2008: 7.0p), an increase of 10% reflecting the Board’s confidence in the future.

StrategyMelrose’s strategy is by now well understood. We continue to look for businesses where our combination of increased management focus and strong but selective investment is likely to produce above average returns for investors. This strategy will include the sale of these businesses at the appropriate time, normally in a three to five year period, with proceeds being returned to shareholders in the most efficient way possible.

We continue to believe that market and economic conditions favour acquisitions over disposals at present and so we continue to look for the right opportunity. Fortunately, the strong growth potential of our existing businesses over the next few years gives us the ability to be patient and we will exercise our customary caution in our selection process.


Melrose owns a group of businesses with strong market positions serving different sectors and operating in different parts of the world, which has provided the Group with a considerable degree of protection from the economic downturn.

During the year there have been many positive operational achievements in the Group, but the highlight has been the excellent cash generation. Although this was achieved partly on the back of lower capital expenditure in the year, it was largely as a result of profit and greatly reduced levels of working capital. Indeed, during the year 149% of headline operating profit was converted into cash, resulting in net debt at the year end of £321.7 million compared with £543.1 million at the beginning of the year. Net working capital of the Group was 8.8% of sales at 31 December 2009 compared with over 16% for the FKI group prior to its acquisition by Melrose. This has been achieved as a result of the consistent application of focused cash management disciplines throughout the year, rather than by the use of temporary period end squeezes on working capital.

Chief Executive’s review

“ During the year there have been many positive operational achievements in the Group, but the highlight has been the excellent cash generation.”

Headline operating profit conversion to cash

149%

Annualised payroll savings

£80m

Headline operating profit margin (second half)

13%


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OutlookThe fragile signs of global economic recovery that emerged in the second half of 2009 have continued to build and as we enter the new year there is undoubtedly a much improved feeling of confidence, albeit tinged with some caution.

In our early cycle businesses this upturn has already been reflected in higher sales, whilst in our later cycle businesses order books have been improving, which will translate into higher sales as appropriate. On the back of operational efficiency gains in our manufacturing plants and lower costs, this should feed through strongly into better performance.

Barring any unforeseen events, we are very positive about the potential of the Group for this year.

David Roper10 March 2010

In addition, timely action by operating management to reduce costs in their businesses greatly limited the impact of the downturn in sales on profit. Since the downturn began, in excess of £80 million of payroll related costs on an annualised basis have been taken out of the businesses. It is estimated by management that approximately 70% of these costs are volume related and will therefore return as sales recover, with the remaining 30% being of a more permanent nature.

The Energy division as a whole had a very satisfactory year. Although sales in the year at Brush Turbogenerators were down on the previous year, profit was maintained. This was achieved by substantial operational efficiency gains at the three manufacturing plants, cost reductions and an increasing proportion of higher margin aftermarket sales. With signs of a gradual upturn in orders in this business going into the new year and with a lower and more efficient cost base, we are confident that 2010 will be a good year.

In the Lifting division although Bridon had a record profit year in 2009, Crosby had a difficult year. Bridon benefited from a very strong opening order book with a good mix of high margin offshore oil and gas sales. Although this line of business is projected to decline in 2010 it will be counterbalanced by higher levels of activity in other sectors such as the bridge and stadia business. On the back of the continuing improvements in operational efficiency Bridon is well positioned to grow strongly as the upturn in the global economy develops. Crosby suffered a significant decline in sales in 2009 on the back of the fall in the gas price in late 2008, yet still managed to achieve a return on sales in excess of 10%, reflecting the intrinsic quality of the business. On the back of a significantly lower cost base and with signs of the distributors restocking, 2010 should see an improvement in the trading result.

As another of Melrose’s early cycle businesses, Dynacast was quick to feel the effect of the economic downturn and as a result sales were significantly lower in 2009 than in the previous year. However, actions to reduce costs limited the impact on profit. With positive signs of Dynacast’s markets improving, there is confidence that 2010 will be a year of recovery.


Energy review£418.3mRevenue

£61.0mHeadline operating profit

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Brush TurbogeneratorsBrush Turbogenerators’ winding specialist inserting copper coils into the stator assembly of a Brush Frame 7 turbogenerator, designed to encompass the 10-85 MW range, destined for the American market. This type of medium-range air-cooled generator is ideal for embedded generation where power stations, usually gas turbine based, are built close to the load centres that they serve.

Brush Transformers

This 33 kV transformer has been designed to meet the specific demands of the UK distribution network operators. Brush Transformers provides approximately 80% of the 33 kV transformers supplied across the UK’s utility providers.

Harrington

Harrington’s 12.5 kVA generators are being used to power the mobile Guinness® Football Viewing Centres. Vans specially equipped with giant LED screens and sound systems will tour Nigeria to broadcast the 2010 World Cup.

Market leading manufacturers of electricity generating equipment, switchgear and transformers.


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Hawker Siddeley Switchgear (“HSS”)HSS produces a wide range of indoor and outdoor electrical distribution equipment, principally electrical switchgear, and sells into global markets.

HSS’s results for the year ended 31 December 2009 were excellent. On slightly lower sales compared to the previous year profit more than doubled. In addition, tight control of working capital in the period resulted in good conversion of profit into cash. HSS continued to focus on business process improvements, further refining its supply chain and applying lean principles throughout the company.

Both the UK and Australian operations had healthy sales in the year. This was underpinned by robust demand in the power distribution market and growth in orders in the mass transit markets in the UK and overseas where the company secured business on a number of high profile infrastructure projects.

The China facility in Shanghai commenced component manufacture in the latter part of the year and is set to play a key role in progressing the company’s strategy for South East Asia. This business is well positioned in what should be a growing market over the next few years.

OutlookHSS entered 2010 with an order book equivalent to seven months’ sales. This, together with the ongoing operational improvements in the business and promising developments in new markets, gives us confidence that HSS will have another good year in 2010.

Brush TransformersBrush Transformers manufactures mid-range power transformers for the UK electrical utilities and the oil and gas sector, principally in the Middle East.

Brush Transformers reported a good set of results for the year ended 31 December 2009, with profit significantly higher than in 2008 on similar sales. In addition, excellent cash management during the year resulted in very strong profit conversion into cash.

The UK business in Loughborough succeeded in retaining its key utility contracts with UK DNOs going into the next five year Ofgem review period starting in 2010. Although Ofgem has indicated that the DNO spend on the network will be higher than in the previous five year period, it is expected that year one will be slow.

The increase in profitability of the company during the year was largely as a result of a continuing focus on operational efficiency improvements.

The joint venture in Abu Dhabi (Brush Transformers holds 49%), which serves the local utilities and oil markets, had good sales and profit growth in its second year of operation. The factory continues to receive formal supply approval from local customers which is most encouraging.

Approval was granted during the year for a £1 million project to establish a manufacturing operation in Beijing to supply the local mining industry. It is expected that the factory will be operational in early 2011.

OutlookAlthough UK demand for power transformers is expected to dip in 2010 (for the reasons explained above), the requirements from the oil and utility sectors in the Middle East remain positive. With ten months order book cover, Brush Transformers starts 2010 with a degree of confidence.

GeneratorsBrush Turbogenerators is the world’s largest independent manufacturer of electricity generating equipment for industrial, marine, oil and gas and offshore applications. With three plants in the UK, Holland and the Czech Republic, it designs, manufactures and services generators ranging from 10 MW to 250 MW for both steam and gas turbine applications and supplies a globally diverse customer base.

Marelli Motori, based in Italy, is one of the world’s leading manufacturers of industrial electrical motors and generators with a product portfolio ranging from 12 kW to 4.5 MW.

Harrington is a specialised UK based generator manufacturer servicing the rail, telecommunications, construction and military markets.

The global power generation market softened in 2009 as economic activity declined and Brush Turbogenerators’ new-build sales reduced by 14% over 2008. However, management’s strategy to focus on the more profitable generator aftermarket whilst at the same time aggressively controlling operating costs proved highly successful.

Aftermarket sales increased by 20% in the period and at the year end represented 25% of the business. Since the year end Brush Turbogenerators has acquired Generator and Motor Services (“GMS”), a US $10 million sales aftermarket business based in Pittsburgh, USA. With an installed base of over 1,300 Brush machines operating in the Americas, GMS will provide a good local platform from which to exploit the exciting market potential of this sector.

It is particularly pleasing to note the progress made in the year in the Czech operation, Brush SEM. This follows the capital expenditure programme initiated post acquisition to invest in new machinery to alleviate capacity bottlenecks and improve productivity. Added to the cost reduction programme in 2009 this has resulted in a significant improvement in operating margins in 2009.

A new management structure was put in place at Brush HMA, Brush Turbogenerators’ business in Holland, during 2009. This again has resulted in a more focused business operating on a more efficient and lower cost base.

Whilst still early in the process, a focused sales strategy is now delivering results at Turbogenerators. When coupled with the decision to extend the product range into higher output machines, it expands the customer and geographic base of the business.

The result of all these changes since acquisition is a more efficient cost base which is better aligned with market opportunities and thus able to exploit the growth potential more profitably.

After a record year in 2008, Marelli recorded lower sales in 2009 reflecting weaker conditions in its market. Management were swift to act and reduced costs and headcount. Management continued to focus on increasing the sales of larger and more profitable generators and motors in the year. Capital investment was directed at developing new products with more specialised and higher power applications such as the new 800 frame alternator and electric motor in high voltage.

Harrington’s sales fell by 30% in 2009 as a result of a very weak UK market. Management responded quickly to cut costs and accelerated the transition of the business to more specialised applications where the company has developed market leading expertise.

OutlookAlthough demand in Brush Turbogenerators’ market has been soft in 2009, the year ended with an order book of £225 million, representing well over 50% of its budgeted sales, and there are preliminary signs of a gradual upturn going into 2010. We are hopeful that any such increase in sales on the back of the lower and more efficient cost base of the business, together with the exciting opportunities in the aftermarket business, will result in a good year.


Lifting review


Bridon

Bridon manufactured, installed and tensioned in excess of six kilometres of cable used to support the new Kurilpa pedestrian bridge in Brisbane, Australia. The bridge was designed utilising an engineering principle called “tensegrity”. Tensegrity balances the tension resistant ability of Bridon’s high strength cables with the compressive strength of struts, to produce a lightweight solution for this new crossing of the Brisbane River.

Crosby

Crosby is working together with a US manufacturer in the development of a lifting system for the new F35 Joint Strike Fighters. Four custom-designed hoist rings are utilised on each aircraft to lift the aircraft off an airfield or an aircraft deck for maintenance or in the event of an accident. The project includes orders from the UK, Canada, Australia, Italy and the Netherlands.

£419.0mRevenue


World leading suppliers of wire, wire rope products, lifting fittings and blocks.


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Bridon’s mining business, positively affecting activity levels in the Canadian Tar Sands as well as the overall demand for coal. As a result of Bridon’s broad product range and global presence, the business is well positioned to take advantage of the improving conditions in both of these key market sectors.

CrosbyCrosby is a world leader in the manufacture and sale of fittings and blocks to the oil and gas, construction and mining sectors, primarily through a global network of specialist distributors.

As signalled in last year’s Annual Report, Crosby has faced very difficult market conditions in 2009. Despite a drop in revenue of over 25% this business has still produced a double digit return on sales which is a testament to its quality.

With its greater exposure to the onshore gas markets – in contrast to Bridon – where projects tend to be smaller and customers have been more affected by the global credit squeeze, Crosby’s sales responded sharply to the fall in the gas price in late 2008. As a result, early action was taken to cut costs, which has included a large reduction in headcount, the elimination of overtime, inventory reductions and continued emphasis on lean manufacturing at all manufacturing locations.

With a fall in demand from the OEM crane business, Crosby has witnessed a return to its long-term historical product mix of lifting fittings sold through its traditional distributor base. In recognition of this, management has redoubled its efforts to gain market share by working closer with its distributors, focusing on more technical training, improving customer service support and building further on the relationships with these key customers.

In addition, during the year there was an increased emphasis on building on the strength of the Crosby name overseas through a focus on the growth opportunities in Europe, Asia Pacific (especially China) and Latin America. In 2009 crane block and sheave manufacturing centres were brought on line in Belgium and China. Establishing these two operations closer to their end markets greatly reduces lead times and will enable Crosby to better service its customers.

Crosby has built its business in Europe through a series of acquisitions of different companies over the years and these businesses have operated to a large degree independently of each other. During the year a restructuring of these operations was undertaken in order to rationalise and co-ordinate the manufacturing and sales functions, which has resulted in a considerably leaner and more efficient business.

OutlookAlthough Crosby’s markets remain difficult, demand has stabilised and there are signs of distributors restocking. Although it is too early to tell whether this is sustainable, being ultimately dependent on final customer demand, it is nevertheless a reassuring and necessary first step in any recovery.

Crosby is a first class business and with the steps taken to reduce costs and improve efficiency during the year it is very well positioned to recover strongly as the global recovery takes hold.

BridonBridon designs and manufactures a comprehensive range of lifting and stabilising solutions for applications in wire rope, fibre rope, steel wire and strand, serving global customers in oil and gas, mining, industrial, marine and infrastructure.

Bridon reported a record operating profit in 2009. Although sales in the year were marginally down in volume terms over the previous year, profit was significantly higher, resulting in an impressive return on sales for the year. Bridon did benefit, however, from favourable movements in exchange rates during the year as sales in US Dollars and Euros increased in Sterling terms.

Cash generation was very strong in the year with 137% of headline operating profit being turned into cash, although part of this reflects some advance payments received during the year in respect of contracts won in the structures business (mostly stadia and bridge projects).

A record opening order book combined with solid activity in offshore oil and gas and energy-related coal mining were major factors behind these results. Bridon also benefited from a significant increase in demand related to global infrastructure construction, securing contracts for a major new bridge project in Norway and several new stadia to be built in 2010.

Bridon’s High-Performance Crane and Industrial business was hardest hit by the recession, suffering a significant decline in sales as commercial construction and industrial production slowed dramatically in the wake of the global financial crisis.

Product development efforts have been focused on seeking to meet customers’ increasing specification requirements for demanding applications. In addition to a number of product enhancements, during the year Tiger DuraCore was introduced into the market. This is the next generation of shovel hoist ropes for use in surface mining, made with a combination of wire rope strands and polymer cores and outer covering which are capable of withstanding extreme operating conditions.

During the year an investment of approximately £3 million to increase Bridon’s manufacturing capability for large multistrand ropes in its German factory was approved, along with significant upgrades in its North American ropery and UK based testing facilities. In addition work has continued to improve the factory in Hangzhou, China, to ensure Bridon quality standards and it is expected that sales will increase both domestically and for export. The programme to upgrade the wire mill in Doncaster is on schedule.

OutlookWhile an improving global economy will help to stimulate modest growth in construction and industrial production, it is expected that market conditions in Bridon’s High-Performance Crane and Industrial business will remain subdued in 2010, particularly in North America. However, Bridon should benefit from the various stadia and bridge contracts secured in 2009, and also expects to see improvements in its efforts to further penetrate developing markets such as China, South East Asia and Brazil.

Against the backdrop of a global economy that is struggling to find its feet, Bridon enters 2010 with cautious optimism. With oil prices back up to the US $70 – $80 per barrel range, offshore and land-based oilfield activity is expected to increase gradually through the year. The firmer oil price is also expected to benefit


Dynacast review


Blu-ray

Dynacast is a leading manufacturer of the optical pick-up, the laser read-head found in all Blu-ray, CD and DVD players. The part is produced in zinc or magnesium, which is unique to Dynacast. Casting needs to be extremely precise, as laser and mirror guides are directly bonded to the cast surface during assembly. Dynacast creates value when producing this part by eliminating the need for expensive CNC machining after the part is cast.

MP3

Dynacast manufactures mid-frames (or mounting chassis) for a wide variety of electronic handheld devices, including MP3 players. Customers come to Dynacast as the company has the ability to cast super-thin-wall geometry (i.e. less than 0.5mm thick) in aluminium, magnesium, and zinc. This unique technology gives customers the freedom to design their mid-frames with complex geometry not available in competing manufacturing processes like metal stamping.

Phone

One of Dynacast’s telecommunications customers developed a very small, “slider” mobile phone. The challenge for Dynacast was to die-cast an overall 1mm thin component with partly smaller sections of 0.4mm. With the support of advanced flow analysis, modelling techniques and the new SIS multi-slide magnesium die-casting machine, the engineering team in Germany successfully managed to produce a high quality product for a demanding market.

£208.7mRevenue


Global designer and manufacturer of precision engineered die-cast metal components and assemblies.


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North America was the worst affected region with underlying revenue down approximately 40% in the period. Continued turmoil in the automotive sector, coupled with the global recession, hit this region very hard. Here cost reduction plans were implemented swiftly. Fishercast Canada produced very good results in 2009 with margins well ahead of expectations.

Underlying revenue in Asia fared better in 2009 falling approximately 15% compared with 2008. Growth in the sales of electronics components into the Chinese market was a factor in limiting the sales decline. Dynacast opened its new 4,500 square metre factory in Dongguan, South China in July and it is performing in line with plan. Management remain encouraged by the prospects in this region.

Dynacast continues to assess its manufacturing capacity against regional demand and growth prospects. The sales decline in North America has led to overcapacity in that market. Accordingly the decision was taken in late 2009 to close the Montreal die-casting facility and transfer its production to other North American plants. This is budgeted to cost £6.8 million and will reduce operating costs while retaining sufficient capacity for future growth.

OutlookThe stabilisation in Dynacast’s markets, noted at the time of the Interim Results, has progressed into a general improvement in demand. Although some of the costs taken out of the business will reverse on the back of increasing volumes, it is expected that some efficiency gains will be retained and that these will have a beneficial impact on profit as sales increase.

DynacastDynacast is a global manufacturer of precision engineered, die-cast metal components and assemblies. The products are manufactured using proprietary die-casting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications, consumer electronics and computer hardware and peripherals.

Dynacast’s results for 2009, in common with a lot of other engineering businesses, reflect a very tough year. Trading in the first half was particularly difficult, with underlying sales about a third below the comparable period in 2008. As reported in the Interim Statement, early and decisive cost cutting by management mitigated the impact of the fall in sales on profit. Trading conditions improved slowly in the second half of the year such that for the year as a whole the underlying fall in sales over 2008 reduced to 25%. It is notable, however, that despite this Dynacast has still produced operating margins of over 10% this year.

The profit in 2009 includes a foreign exchange gain on translation of just over £2 million, reflecting the general weakness of Sterling in the period and a significantly improved contribution from Fishercast, which was acquired in August 2008.

The price of zinc, Dynacast’s primary raw material, rose steadily in 2009, mirroring its fall in 2008, though the average LME cost in 2009 fell to US $1,658 compared to US $1,869 in 2008. Average aluminium alloy prices also declined in 2009 and the combined effect of this accounts for approximately £10 million of the fall in revenue from 2008 to 2009. Dynacast benefits from the ability to pass on its metal costs, as a result of which these price movements have no significant impact on profit.

A very focused approach to the management of cash resulted in an excellent 181% conversion of profit into cash in 2009.

Sales in Europe after adjusting for metal prices and exchange rates were down over 30% in 2009 compared to 2008. Although decisive and radical steps were taken to reduce costs, the legal and social framework in Europe makes it more difficult to implement such programmes expeditiously. As a consequence, full implementation of the cost reduction actions was not completed until the end of May.


Other Industrial review


Brush Traction

Since the Eurotunnel shuttle locomotives were built in the 1990s, the bogies (chassis) have been overhauled by the Brush Traction site in Loughborough, UK. New wheels and overhauled gearbox are shown assembled at the Brush Traction site in Kilmarnock, Scotland, ready for fitment at Loughborough.

Harris

The high performance horizontal balers are production machines used for medium to large tonnage recycling operations. These balers are capable of producing bale weights that meet or exceed maximum container weight capacities, so that containers, will weigh out before they cube out.

MPC

This fully automated battery box cell is manufactured for the Ford Fiesta. It incorporates moulding, insert loading, metal bending, welding and final auto stillage packing.

£252.5mRevenue


Market leading manufacturers across the housing, construction, automotive, scrap processing and other industrial sectors.


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TruthTruth designs and manufactures operating hardware, hinges and locks for North American producers of windows, patio doors and skylights utilised in both the new construction and the repair and remodel residential markets. Most of Truth’s products are manufactured in its plants in Minnesota, USA and Ontario, Canada.

Truth has staged an excellent recovery in the year ended 31 December 2009. As one of Melrose’s early cycle businesses, sales, particularly in the repair and remodel market (in contrast to the new build sector), began to see a pick up in the second quarter of the year. Although revenue in the year was some 10% lower than in the previous year, profit more than doubled, reflecting the changes made by the new senior management appointed in June 2009.

New housing starts in the USA, to which Truth’s performance is broadly correlated, were more than 50% lower in 2009 than at their recent peak in 2005/2006. It is against this market background that the Truth performance in 2009 should be judged.

In addition, an aggressive and targeted sales and marketing campaign allied to new product introductions resulted in significant market share gains. This was assisted by a pick-up in Truth’s Canadian new build market in the year.

A major strategic initiative was undertaken in the year to outsource the manufacturing of lower margin products to China. This will have the effect of freeing up valuable space in Truth’s Minnesota plant to focus on the production of higher margin casement units, thereby reducing overtime spend and permitting a more evenly balanced manufacturing schedule over the year, taking account of the seasonality of Truth’s sales. Management estimate that once fully implemented this outsourcing programme will add some 20% to Truth’s capacity in this plant.

OutlookAlthough there are signs of recovery in the Canadian, north-eastern and south-central US builders’ markets, as a result of the continuation of the policy of shedding lower margin sales, it is not expected that Truth’s top line will grow significantly in 2010. Nevertheless, the improvement in market sentiment together with the substantial operational efficiency gains and cost reductions give confidence for further profit improvement in 2010.

HarrisHarris is a leader in scrap and waste reduction equipment design, engineering, manufacturing and servicing. It operates out of two plants in Georgia, USA, and has full service capability and serves the scrap metal and fibre recycling industries.

Harris performed well in 2009 considering the extraordinary global economic and financial conditions and the capital intensive nature of its business. Sales declined by nearly 30% in the year compared to 2008, but the impact on profit for the year was mitigated by a significant cost reduction programme resulting in a headcount decline of 36% in the year. As a result Harris achieved a creditable return on sales in the period of over 10%.

The weakness in the global economy and the shortage in the availability of credit reduced the prices of scrap metal and fibre in 2009 – key determinants in the activity levels in this industry. Recyclers reduced demand for capital equipment in the year resulting in a decline in Harris’ order intake during the year of nearly 60%.

Harris continued its commitment to invest in design and engineering capability to provide highly engineered solutions for customised applications through its new product development group in 2009. Harris expects that up to one quarter of its orders for 2010 could be for newly-launched products.

Harris’ continued push into the parts and services business has progressed well during the year with aftermarket sales representing about 30% of Harris’ sales in 2009 compared to approximately 20% in 2008.

OutlookA healthy increase in fourth quarter 2009 orders and a good start to the new year, together with positive trends in steel and scrap pricing, indicate that conditions in Harris’ markets are showing signs of recovery. Harris is well positioned to meet the opportunities and challenges in 2010 – with new products coming on stream, the increasing (higher margin) aftermarket sales and the lower, more efficient cost base give confidence of a satisfactory outcome.


MPCMPC manufactures engineered plastic injection-moulded and extruded components and metal pressings for sectors including food and beverage packaging, automotive, construction and industrial.

Revenue and profit were significantly lower in the year ended 31 December 2009 due to the general economic downturn, which particularly affected the UK automotive and building markets. However, as signalled in the Interim Report, MPC recovered strongly in the second half of 2009 after trading near breakeven in the first half. Despite these poor trading conditions MPC delivered a resilient performance, reflecting the intrinsic quality of the business with its highly specialised engineering skills together with stringent cost control and efficiency measures.

Most importantly, throughout this year, major efforts were made to focus on MPC’s core skills to maintain its proven levels of technical differentiation. During the year, this has proved highly successful with orders for the design, development and manufacture of new products for key customers such as Marks & Spencer, Makita, Jaguar Land Rover and Wavin. A number of these wins are linked to a move into a manufacturing niche using new materials and technologies building on MPC’s core engineering skills.

OutlookMPC currently enjoys its largest ever new business order book, the majority of which will go ‘live’ in 2011. The forecasts for 2010 reflect not only a modest recovery in general trading but a number of good margin new product introductions. As the economy begins to recover and competitors continue to struggle, MPC is well positioned to capitalise on market opportunities and benefit at the same time from weaker Sterling. We look forward with confidence to a successful 2010.

Other Industrialcontinued

Brush Traction (“Traction”)Traction specialises in the refurbishment and re-engineering of railway locomotives and components from its two sites at Loughborough and Kilmarnock.

Although the trading result was lower in 2009 than in the previous year, reflecting the scheduled ending of the major High Speed Train (“HST”) contract, it was nevertheless a satisfactory outcome.

During the year the major activities at Loughborough derived from a contract to overhaul Eurotunnel shuttle locomotives and smaller continuation contracts to repower other operators’ HST power cars with the new MTU diesel engine and associated equipment. Kilmarnock completed a contract to refurbish catering vehicles for First Great Western together with other vehicle and overhaul work.

The rail vehicle industry is generally late cycle, particularly at the heavier end where contracts can take months, if not years, to be awarded and similar timescales to fulfil. Thus, apart from the wheel overhaul business at Kilmarnock, which was adversely affected in 2009, sales and output for the group were not seriously affected by the recession in 2009.

OutlookAs a result of this lagged effect, it is expected that 2010 will be a more difficult year for Traction, although with signs of economic recovery the wheelset overhaul business is showing signs of picking up in 2010. With continuing steps to reduce costs and improve operational efficiencies, we are hopeful of a satisfactory outturn in 2010.


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“ It is pleasing to see that the Group’s headline operating profit return on revenue percentage improved from 10.8% in 2008 to 11.5% in 2009. Indeed in the second half of 2009 it increased further to 13.0%.”

The year to 31 December 2009 was the first full year since the acquisition of FKI plc on 1 July 2008, which increased the size of the Melrose Group by approximately six times. Consequently the results shown for the year ended 31 December 2009 cannot easily be compared to the results for the year ended 31 December 2008 in a meaningful way.

In compliance with IFRS 5 the comparative results for the year to 31 December 2008 have been restated to include the Logistex Europe business, which was sold on 28 August 2009, within discontinued operations.

Group trading results – continuing operationsThe continuing operations at 31 December 2009 include four trading divisions, namely Energy, Lifting, Dynacast and Other Industrial.

To help understand the results of the continuing operations, the term “headline” has been used. This refers to results that are calculated before exceptional costs, exceptional income and intangible asset amortisation, as this is considered by the Melrose PLC Board to give the best illustration of performance.

For the year ended 31 December 2009 the Group achieved revenue from continuing operations of £1,298.5 million (2008: £895.3 million), headline operating profit of £149.7 million (2008: £96.6 million) and operating profit of £113.1 million (2008: £70.1 million). Headline profit before tax was £118.6 million (2008: £73.1 million) and profit before tax was £82.0 million (2008: £23.5 million).

The most comparable measure of performance year on year is headline earnings per share (“EPS”). In 2009 headline basic EPS was 16.6p (2008: 16.1p), representing a 3% increase on 2008. After exceptional costs, exceptional income and intangible asset amortisation, the EPS was 11.0p (2008: 4.1p).

FinanceDirector’s review

Cashflow from headline trading

£154.5mNet debt to headline EBITDA

1.76times

Working capital

8.8%ofsales


Finance Director’s reviewcontinued

A profit for the year from discontinued operations of £24.6 million (2008: loss of £61.2 million) has been included in the Income Statement consisting of the following items:

Discontinued £m

Operating profit of discontinued businesses 15.2 Profit on disposal of businesses 9.7 Other 5.4 Tax on discontinued businesses (5.7)

Total 24.6

Finance costs and incomeThe headline net finance cost in 2009 was £31.1 million (2008: £23.5 million). Prior to the FKI acquisition on 1 July 2008 the Group was in a net cash in hand position and consequently for the first half of 2008 the Group had net finance income.

Net interest on external bank loans, overdrafts and cash balances was £20.3 million (2008: £18.3 million), which is protected from interest rate changes by a number of interest rate swaps which fix the interest rate on £366.5 million (US $546.0 million and €33.3 million) of term debt. More detail on these swaps is given in the finance cost risk management section of this review. In 2009 the Group had a blended interest rate of 3.5%.

Also included in the net finance cost is a £2.1 million (2008: £1.4 million) amortisation charge for the initial costs of raising the £750 million term loan facility; a net interest cost on pension plans in excess of their expected return on assets of £6.6 million (2008: £1.8 million); unwinding of discounts on long-term provisions of £1.6 million (2008: £0.8 million) and other finance costs of £0.5 million (2008: £1.2 million).

Earnings per share and the number of shares in issueIn accordance with IAS 33, two basic earnings per share (EPS) numbers are disclosed on the face of the Income Statement, one for continuing operations which is 11.0p (2008: 4.1p) and one that also includes discontinued operations, which is 16.0p (2008: loss of 15.3p). In addition two fully diluted EPS calculations are shown which allow for the potential number of shares to be awarded using the current value of the Melrose PLC LTIP. This currently shows a 2% dilution on the continuing EPS.

The performance of each of these trading divisions is discussed in detail in the Chief Executive’s review from page 10 to 18. It is pleasing to see that the Group’s headline operating profit return on revenue percentage improved from 10.8% in 2008 to 11.5% in 2009. Indeed in the second half of 2009 it increased further to 13.0%. This was driven by strong performances in the Energy and Other Industrial divisions and a full year contribution from the higher margin Energy and Lifting divisions.

Central costs comprise £8.9 million (2008: £10.6 million) of Melrose PLC corporate costs and a Long Term Incentive Plan (“LTIP”) charge of £6.8 million (2008: £6.2 million). The LTIP cost includes a charge for the Melrose PLC LTIP of £1.8 million (2008: £2.0 million) and a charge for the LTIP schemes for divisional management of £5.0 million (2008: £4.2 million). This latter amount in 2009 relates to a charge for cash-based incentive schemes to reward improvements in business performance over the period to 2014.

Discontinued operationsAll three businesses which were shown as “held for sale” within discontinued operations in 2008 have been sold within 2009.

On 22 June 2009, Melrose sold Logistex North America to Intelligrated Inc for sales proceeds of £24.6 million less disposal costs of £1.3 million and a cumulative exchange movement recycled through the Income Statement of £6.4 million. Logistex North America had net assets of £22.0 million, resulting in a profit on disposal of £7.7 million.

The Welland business was sold on 10 June 2009 for net proceeds of £0.8 million and Rhombus was sold on 3 April for net proceeds of £1.5 million. A cumulative exchange movement of £1.4 million was recycled through the Income Statement. These two businesses had combined net assets of £5.5 million resulting in a loss of £0.3 million and £1.5 million respectively.

In addition to the businesses held for sale last year, the Logistex Europe business was also sold on 28 August 2009 to Beumer Group for sales proceeds of £26.1 million less disposal costs of £2.5 million and a cumulative exchange movement recycled through the Income Statement of £3.6 million. Logistex Europe had net assets of £23.4 million, giving a profit on disposal of £3.8 million.

Trading results by division – continuing operationsA split of revenue and headline operating profit by division is as follows: 2009 Headline 2009 operating profit/ Headline 2009 2008 (loss) before 2009 2008 2009 operating Return on Return on depreciation and Return on Return on Revenue profit/(loss) revenue revenue(1) amortisation revenue revenue(1)

£m £m % % £m % %

Energy 418.3 61.0 14.6 13.5 68.5 16.4 15.1Lifting 419.0 62.5 14.9 15.4 71.7 17.1 17.3Dynacast 208.7 21.3 10.2 13.6 30.1 14.4 16.7Other Industrial 252.5 20.6 8.2 7.2 28.0 11.1 9.3Central – corporate – (8.9) n/a n/a (8.2) n/a n/aCentral – LTIPs(2) – (6.8) n/a n/a (6.8) n/a n/a

Group 1,298.5 149.7 11.5 10.8 183.3 14.1 13.1(1) Melrose ownership period only.(2) Long term incentive plans.


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Cash generation and managementMelrose has a strong track record of generating cash from its businesses. A key performance measure for Melrose is the percentage of profit conversion to cash. This represents the amount of cash (post working capital movement and capital expenditure) that is generated from headline operating profit. In the year to 31 December 2009 149% (2008: 166%) of headline operating profit has been converted to cash. This means that the long-term Melrose headline operating profit conversion to cash from 2003 to 2009 is now 132%.

The cash generation has been achieved across all divisions as shown in the table at the bottom of the page.

This excellent cash generation has enabled Melrose to generate £154.5 million of cash from trading after all costs including tax in the year to 31 December 2009. Importantly, since the acquisition of FKI on 1 July 2008, £245.0 million of cash has been generated from trading after all costs including tax. In addition, £48.6 million of net cash has been generated from disposals and £56.7 million has been paid to shareholders. This has meant that, at constant exchange rates, net debt has reduced by £237.0 million, 51% since the acquisition of FKI on 1 July 2008.

Since FKI 2009 acquisition Full year (1 July 2008)Movement in net debt £m £m

Opening net (debt)/cash (543.1) 22.3 Acquired net debt – (471.7)Net cash flow of acquisitions – (11.2)Net cashflow from disposals 48.6 48.6 Cash flow from trading (after all costs including tax) 154.5 245.0 Amount paid to shareholders (35.6) (56.7)Foreign exchange movement 56.0 (98.1)Other non-cash movement (2.1) 0.1

Closing net debt (321.7) (321.7)

Importantly, a headline basic EPS number is shown. The Melrose Board believes that this gives a better reflection of the performance in the year as it strips out the impact of exceptional costs, exceptional income and intangible asset amortisation. The headline EPS for the year to 31 December 2009 is 16.6p (2008: 16.1p) which represents a 3% increase.

As a consequence of the equity issue for the FKI acquisition on 1 July 2008 the number of shares in issue increased from 133.7 million to 497.6 million. Consequently the weighted average number of shares in 2008 was 315.6 million as the equity issue occurred halfway through the year. In 2009 there were no further equity issues and so the weighted average was 497.6 million.

Exceptional costs and incomeMelrose has continued to undertake significant action to improve the operational and financial performance of the Group. To achieve this exceptional costs and exceptional income have been incurred and, along with intangible asset amortisation, these have been highlighted on the face of the Income Statement. Exceptional operating costs amounted to £23.9 million (2008: £12.9 million), exceptional income to £14.0 million (2008: nil) and intangible asset amortisation to £26.7 million (2008: £13.6 million). Exceptional operating costs and income consist of the following items:

TotalExceptional operating costs £m

Labour related one-off costs (15.4) Restructuring costs (8.5)

Total (23.9)

TotalExceptional operating income £m

US retiree benefit plan closures 9.0 Release of fair value provisions 5.0

Total 14.0

The Group incurred £15.4 million of labour related one-off costs, relating primarily to headcount reductions, in response to the economic downturn. In addition, the Group incurred £8.5 million of costs relating to restructuring programmes which include plant closures and relocations.

During the year, certain US retiree benefit plans have been closed resulting in a release of an accrual for the future retirement benefit obligation for continuing operations of £9.0 million. In addition, due to management actions in 2009, £5.0 million of surplus provisions have been released to exceptional income so as not to distort headline results.

Cash generation and management Other Total £m Energy Lifting Dynacast Industrial Central continuing Discontinued Total

Headline operating profit/(loss) 61.0 62.5 21.3 20.6 (15.7) 149.7 15.2 164.9

Headline operating cash generation (post capex) 92.2 92.6 38.6 28.3 (11.1) 240.6 5.5 246.1

Headline profit/(loss) conversion to cash 151% 148% 181% 137% (71%) 161% 36% 149%



During Melrose’s ownership of FKI the cash generated from working capital, at constant exchange rates, has been £148.3 million, which represents a 56% reduction in net working capital. A further measure of improvement is that the percentage of net working capital to sales for the Melrose Group has reduced to 8.8% at 31 December 2009 compared to over 16% for the FKI group prior to its acquisition. Importantly, these improvements to working capital have been achieved without an artificial squeeze to working capital at the financial period end.

TaxAs expected, the headline Income Statement tax rate in 2009 was 30% (2008: 30%).

This is broadly in line with the Group’s natural tax rate, based on the mix of 2009 contributions of profit by country and the standard statutory tax rate in those countries. The overall effect on the Group of higher rates in North America and certain European countries is offset by the benefit that continues to arise from lower tax rates in the Far East and other European countries.

The rate after exceptional items and intangible asset amortisation is 33% (2008: 43%), which is higher than the headline rate because certain exceptional costs are not expected to give rise to tax deductions.

The headline cash tax rate of 3% (2008: 22%) is particularly low due to benefits arising from the utilisation of prior year losses and other deferred tax assets. A £9.8 million refund was received in the US in respect of losses carried back against profits of earlier years. In the longer term, the headline cash tax rate is expected to trend toward the headline Income Statement tax rate as available losses and other deferred tax assets are used up.

The total amount of tax losses in the Group has decreased mainly as a result of utilisation against current year profits and to settle tax authority enquiries at no cash tax cost. Deferred tax has been recognised on losses and other tax assets only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. The division between recognised and unrecognised losses is as follows:

Recognised Unrecognised TotalTax losses £m £m £m

UK 13.6 209.3 222.9North America – – –Rest of world – 28.5 28.5

Total 2009 13.6 237.8 251.4

Total 2008 53.5 339.0 392.5

The Group’s net deferred tax liability is £103.2 million (2008: £106.4 million). A £112.9 million (2008: £127.7 million) deferred tax liability is provided in respect of brand names and customer relationships acquired. This liability does not represent a future cash tax payment and will unwind as the brand names and customer relationships are amortised.

The detail of the cash flow from trading and the net cash flow of acquisitions is shown below:

Since FKI 2009 acquisitionCashflow from trading Full year (1 July 2008)(including discontinued operations) £m £m

Headline operating profit 164.9 243.7Depreciation and computer software amortisation 36.0 55.0 Working capital movement 69.1 148.3 Net capital expenditure (23.9) (50.4)Headline operating cash flow (post capex) 246.1 396.6 Headline profit conversion to cash (%) 149% 163%Net interest and net tax paid (12.9) (54.0)Pension contributions (32.1) (48.1)Other (including restructuring costs) (46.6) (49.5)Cash inflow from trading 154.5 245.0

Melrose had a Balance Sheet leverage of 1.76x net debt to headline operating profit before depreciation and amortisation at 31 December 2009. Due to excellent cash generation this represents a significant reduction in the leverage for the Group compared to the start of 2009 when the leverage was 2.65x.

Capital expenditureThe pay back on capital projects is a key part of the Melrose strategy to improve operational performance. Inevitably during 2009 capital expenditure opportunities were reduced due to the economic environment, and the Group spent 0.7x depreciation. By division, the capital expenditure in the year was as follows:

Other Energy Lifting Dynacast Industrial Central Total

Net capital expenditure (£m) 9.5 6.0 3.3 4.0 – 22.8

Depreciation (£m) 7.5 9.2 8.8 7.4 0.7 33.6

Net capital expenditure to depreciation ratio 1.3x 0.7x 0.4x 0.5x – 0.7x

Melrose five year (2005-2009) average annual multiple 1.3x

The net capital spend to depreciation ratio is expected to increase in 2010. The five year Melrose average annual net capital spend is comfortably in excess of depreciation at 1.3x.

Working capital managementThe Melrose Board is focused on achieving the correct amount of working capital to allow each division to have the most suitable balance between commercial and financial efficiency. To ensure this happens, working capital days cover targets are set for each business unit for inventory, trade receivables and trade payables.


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In addition, a US defined benefit plan for FKI exists. At 31 December 2009, this had assets of £174.4 million (2008: £182.9 million), liabilities of £191.4 million (2008: £210.9 million) and consequently a deficit of £17.0 million (2008: £28.0 million).

The assumptions used to calculate the IAS 19 deficit of the pension plans within the Melrose Group are considered carefully by the Board of Directors. For the FKI UK Plans a male aged 65 in 2009 is expected to live for a further 20.1 years. This is assumed to increase by 1.6 years (8%) for a male aged 65 in 2024. A summary of the key assumptions of the UK Plans are shown below:

2009 2008 Assumption Assumption % %

Discount rate 5.75 6.30Inflation 3.45 2.75Salary increases 3.95 3.25

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liability on the main UK FKI defined benefit plan by £9.4 million and a 0.1 percentage point increase to inflation would increase the liability on this plan by £5.0 million. Furthermore, an increase by one year in the expected life of a 65 year old male member would increase the pension liability on this plan by £17.3 million, 2.8%.

The Melrose Group contributes £18.0 million to the FKI UK defined benefit plan and £6.1 million cash to the McKechnie UK defined benefit plan per annum. Both plans are being formally valued again based on the position as at 31 December 2008 and new cash contribution agreements will be signed in due course as a result.

The long-term strategy for the UK Plans is to concentrate on the cash flows required to fund the liabilities as they fall due. These cash flows extend many years into the future and the ultimate objective is that the total pool of assets derived from future company contributions and the investment strategy allows each cash payment to members to be made when due. In addition, the strategy includes reducing the volatility of liabilities wherever commercially viable and ensuring that employees have a market competitive pension benefit and are treated fairly.

The McKechnie UK defined benefit plan is closed both to new members and current members’ future service. The FKI UK defined benefit plan is closed to new members. During 2009 the FKI US defined benefit plan was closed to future service and retirement benefits were terminated on the majority of the US retiree benefit plans. In total these latter two actions reduced liabilities by £21.9 million in 2009.

Assets and liabilitiesThe summary Melrose Group assets and liabilities are shown below:

31 December 31 December 2009 2008(1)

£m £m

Fixed assets (including computer software) 254.3 293.9 Intangible assets 403.1 456.0 Goodwill 779.2 829.4 Net working capital 114.3 216.9 Retirement benefit obligations (169.1) (143.3)Provisions (144.2) (158.9)Deferred tax and current tax (152.5) (140.0)Net assets held for sale – 20.4 Other (0.1) (22.1)

Total 1,085.0 1,352.3 (1) Restated to reflect the finalisation of the acquisition accounting of FKI plc.

These assets and liabilities are funded by:

31 December 31 December 2009 2008 £m £m

Net debt (321.7) (544.8)(1)

Equity (763.3) (807.5)

Total (1,085.0) (1,352.3) (1) Excludes net cash in hand of £1.7m shown in net assets held for sale.

Goodwill, intangible assets and impairment reviewThe total value of goodwill as at 31 December 2009 is £779.2 million (2008: £829.4 million) and intangible assets £403.1 million (2008: £456.0 million). These items are split by division as follows:

Other Energy Lifting Dynacast Industrial Total £m £m £m £m £m

Goodwill 245.1 292.6 203.5 38.0 779.2Intangible assets 139.8 221.2 22.8 19.3 403.1Net other assets 22.7 40.9 15.5 2.7 81.8

Total carrying value 407.6 554.7 241.8 60.01,264.1

The non-current assets have been tested for impairment as at 31 December 2009. The Melrose PLC Board is comfortable no impairment is required.

PensionsThe Group has a number of defined benefit and defined contribution pension plans.

The current market value of the assets of the UK pension plans, namely the FKI and the McKechnie UK defined benefit plans (the “UK Plans”) are insufficient to satisfy the liabilities to members when they are valued on a basis consistent with IAS 19. The net accounting deficit on these plans was £129.2 million at 31 December 2009 (2008: £69.3 million). These plans had assets at 31 December 2009 of £671.6 million (2008: £610.7 million, of which £14.1 million was unrecognised in accordance with IAS 19 to stop the deficit being smaller than the amount of the committed payments), and liabilities of £800.8 million (2008: £665.9 million). The strategy to fund this deficit is discussed later in this section.



In accordance with the reporting requirements on going concern issued by the Financial Reporting Council the Directors acknowledge that the economic environment causes uncertainty as to the trading outcome for 2010. The Group has committed borrowing facilities until April 2013. In addition, the breadth of the end markets that the Melrose Group companies fall into, both by sector and geographically, gives some balance to various market and economic cycle risks. Furthermore, as a result of the excellent cash generation record, which has allowed net debt at constant exchange rates to halve in the last eighteen months, the financial headroom has significantly improved. The Group’s forecasts take into account reasonable possible changes to trading performances. As a consequence the Directors believe that the Group can manage its business risks successfully and accordingly the Group financial statements have been prepared on a going concern basis.

Finance cost risk managementThe Group maintained a net debt position throughout 2009. In early 2009 the Group sought protection from exposure to changes in interest rates by entering into a number of interest rate swaps to fix £366.5 million (US $546.0 million and €33.3 million) of term debt. Under the terms of these swaps, the Group has fixed the underlying interest rate at 2.1% for US Dollars and 2.6% for the Euro through to early 2013. At 31 December 2009 this produced a blended interest rate of 3.5% on the £750 million facility, calculated after inclusion of the current 1.75% margin but before amortisation of arrangement fees and non-utilisation fees.

Exchange rate risk managementThe Group trades in various countries around the world and hence the Group is exposed to many different foreign currencies. The Group therefore carries an exchange risk that can be categorised into three types as described below. The Board’s policy is designed to protect against some of the cash risks but not the non-cash risks. The most common cash risk is the transaction risk the Group takes when it invoices a sale in a different currency to the one in which its cost of sale is incurred. This is addressed by taking out forward cover against approximately 60% to 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis or for 100% of each material contract. This does not eliminate the cash risk but does bring some certainty to it.

Exchange rates used in the period Average rate Closing rate

US Dollar:2009 1.57 1.622008 1.74(1) 1.46

Euro: 2009 1.12 1.132008 1.23(1) 1.05(1) Average rate for the six months post FKI acquisition (1 July 2008 to 31 December 2008).

Risk managementThe financial risks the Group faces have been considered and policies have been implemented to best deal with each risk. The four most significant financial risks are considered to be liquidity risk, finance cost risk, exchange rate risk and commodity cost risk. These are discussed in turn.

Liquidity risk managementThe Group’s net debt position improved significantly during the year, ending 31 December 2009 at £321.7 million compared with £543.1 million a year earlier. This decrease in net debt resulted from strong operational cash generation, business disposals and favourable exchange rate translation of foreign currency denominated net debt.

The Group derives its debt from a £750 million syndicated term loan and revolving credit facility which matures in April 2013. The £500 million term loan component of this facility is subject to a 15% repayment amortisation, that progressively takes place between April 2011 and April 2013, with allowance made for any repayments made before this period. The £250 million revolving credit component of the facility is not subject to any such repayments.

The £500 million term loan portion of this facility was converted into currency loans comprising US $686.0 million, €58.3 million and £50.0 million. During 2009 the Group used disposal proceeds to repay US $80.0 million of the US Dollar loans, leaving US $606.0 million, €58.3 million and £50.0 million outstanding at 31 December 2009. Consequently using the exchange rates as at 31 December 2009 the facility is now equivalent to £475.7 million.

Undrawn facility headroom at 31 December 2009 was £224.9 million compared with £108.6 million a year earlier. The facility has two financial covenants: a net debt to headline EBITDA (headline operating profit before depreciation and amortisation) covenant and an interest cover covenant. The first covenant, which now calculates net debt at average exchange rates during the period, is set at 3.25x for December 2009 reducing by 0.25x each year until 2013. At these exchange rates the net debt to headline EBITDA at 31 December 2009 was 1.83x allowing significant headroom compared to the covenant test. The interest cover covenant remains at 3.5x throughout the life of the facility. At 31 December 2009 the actual interest cover was 6.1x which also affords comfortable headroom compared to the covenant test. Covenant tests are performed each June and December.

In addition, there are a number of small uncommitted overdraft and borrowing facilities made available to the Group. These uncommitted facilities are lightly used.

Cash, deposits and marketable securities amounted to £147.5 million at 31 December 2009 (2008: £167.7 million) and are offset against gross debt of £469.2 million (2008: £710.8 million) to arrive at the net debt position of £321.7 million (2008: £543.1 million). In combination with the undrawn committed facility headroom of £224.9 million (2008: £108.6 million), the Directors consider that the Group has sufficient access to liquidity for its current needs.


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Commodity cost risk managementAs Melrose owns engineering businesses across various sectors the cumulative expenditure on commodities is significant to the Group results. The Group addresses the risk of base commodity costs increasing by, wherever possible, passing on the cost increases to customers or by having suitable purchase agreements with its suppliers which sometimes fix the price over some months into the future. On occasions, Melrose does enter into financial instruments on commodities when this is considered to be the most efficient way of protecting against movements.

Geoffrey Martin10 March 2010

The effect on the key headline numbers in 2009 for the continuing Group due to the translation movement of exchange rates from 2008 to 2009 is shown below. The table illustrates the translation movement in revenue and headline operating profit if the 2008 average exchange rates had been used to calculate the 2009 results rather than the 2009 average exchange rate.

The translation difference in 2009 £m

Revenue decrease 74.1Headline operating profit decrease 8.5

For reference, guidelines to show the net translation exchange risks that the Group currently carries and an indication of the unhedged transaction risk, are shown below:

Sensitivity of profit to translation Increase in headlineand unhedged transaction exchange risk operating profit

For every 10 cent strengthening of the US Dollar against Sterling £4 millionFor every 10 cent strengthening of the Euro against Sterling £4 million

As the translation risk is not a cash cost, no exchange instruments are used to protect against this risk. However, when the Group has net debt, the hedge of having a multicurrency debt facility funding these foreign currency trading units protects against some of this risk.

The most significant exchange risk that the Group takes arises when a division that is predominantly based in a foreign currency is sold. The proceeds for those divisions will most likely be received in a foreign currency and therefore an exchange risk arises if these proceeds are converted back to Sterling, for instance to pay a dividend to shareholders. Protection against this risk is taken on a case-by-case basis.


Board of Directors

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Christopher MillerExecutive Chairman

Age 58, he qualified as a chartered accountant with Coopers & Lybrand, following which he was an Associate Director of Hanson plc. In September 1988 he joined the board of Wassall PLC as its Chief Executive. Between October 2000 and May 2003 he was involved in private investment activities. Mr Miller was appointed as an executive Director of Melrose on 29 May 2003. He is currently Chairman of TMO Renewables Limited.

David RoperChief Executive

Age 59, he qualified as a chartered accountant with Peat Marwick Mitchell, following which he worked in the corporate finance divisions of S.G. Warburg & Co. Limited, BZW and Dillon Read. In September 1988 he was appointed to the board of Wassall PLC and became its Deputy Chief Executive in 1993. Between October 2000 and May 2003 he was involved in private investment activities and served as a non-executive Director on the boards of two companies. Mr Roper was appointed as an executive Director of Melrose on 29 May 2003.

Simon PeckhamChief Operating Officer

Age 47, he qualified as a solicitor in 1986. In 1990 he joined Wassall PLC and became an executive Director of Wassall PLC in 1999. From October 2000 until May 2003 he worked for the equity finance division of The Royal Bank of Scotland and was involved in several high profile transactions. Mr Peckham was appointed as an executive Director of Melrose on 29 May 2003.

Geoffrey MartinGroup Finance Director

Age 42, he qualified as a chartered accountant with Coopers & Lybrand, where he worked within the corporate finance and audit departments. In 1996 he joined Royal Doulton PLC and was Group Finance Director from October 2000 until June 2005. During this time, he was involved in projects including raising public equity, debt refinancings and the restructuring and outsourcing of the manufacturing and supply chain. Mr Martin was appointed as an executive Director of Melrose on 7 July 2005.


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Miles Templeman (Chairman)Perry CrosthwaiteJohn GrantDuring 2009 the Audit Committee met three timesFor more information see page 37 and 38.

Audit Committee

Perry Crosthwaite (Chairman)Miles TemplemanJohn GrantDuring 2009 the Remuneration Committee met three timesFor more information see page 38.

Remuneration Committee

Miles Templeman (Chairman)Perry CrosthwaiteJohn GrantChristopher MillerDuring 2009 the Nomination Committee met three timesFor more information see page 38.

Nomination Committee

Miles TemplemanNon-Executive Director

Age 62, he has been a director of several consumer goods and retailing companies. He was Managing Director of Threshers Off-Licences between 1985 and 1988 and Managing Director of Whitbread Beer Company between 1990 and 2001. Mr Templeman was Chief Executive Officer of HP Bulmer Holdings PLC from January 2003 to July 2003 and non-executive Chairman of restaurant chain YO! Sushi between 2003 and 2008. He has also held a number of other non-executive directorships and was appointed as a non-executive Director of Melrose on 8 October 2003. Since October 2004, Mr Templeman has held the position of Director General of the Institute of Directors. He is currently non-executive Chairman of Shepherd Neame, the Kentish family brewer.

Perry CrosthwaiteNon-Executive Director

Age 61, he has over 30 years’ experience as a Director in the City of London. He was a founding Director of Henderson Crosthwaite Institutional Brokers Limited, serving on the board until its acquisition by Investec Group (UK) PLC in 1998. He became a Director of Investec Bank (UK) Limited and Chairman of the Investment Banking division until his retirement in 2004. Mr Crosthwaite was appointed as a non-executive Director of Melrose on 26 July 2005. He is currently Chairman of Jupiter Green Investment Trust Plc and a non-executive Director of ToLuna Plc.

John GrantNon-Executive Director

Age 64, he spent his executive career in a variety of senior international roles within the automotive industry and other engineering businesses. He was Chief Executive of Ascot Plc between 1997 and 2000. Prior to that, Mr Grant was Group Finance Director of Lucas Industries Plc (subsequently LucasVarity Plc) between 1992 and 1996. He previously held several senior strategy and finance positions with Ford Motor Company in Europe and the USA. Mr Grant was appointed as a non-executive Director of Melrose on 1 August 2006. He is currently Chairman of Gas Turbine Efficiency Plc, Surion Energy Limited and Torotrak Plc, and non-executive Director of MHP S.A., Pace Plc and The Royal Automobile Club Limited.


The Directors of Melrose PLC present their report and the audited financial statements of the Group for the year ended 31 December 2009.

Principal activities and business review Melrose PLC’s stated strategy is to acquire companies and businesses whose operational performance the Directors believe can be improved to create shareholder value. The executive Directors have extensive experience of identifying and evaluating acquisition opportunities, quoted and unquoted, both in the UK and overseas; as well as recognising the appropriate time in the business cycle for disposal, in order to provide funding for future acquisitions and return funds to investors as appropriate.

The Company has already achieved results for shareholders under this strategy, with the successful acquisitions and restructures of the McKechnie and Dynacast Groups (May 2005) and FKI plc (July 2008). Two of the McKechnie divisions, McKechnie Aerospace and PSM Fasteners, were separately disposed of two years after their acquisition, in May 2007. The Company used the combined proceeds from the two disposals of £458 million (Aerospace: £428 million; PSM Fasteners: £30 million) to return £220 million to shareholders and repay £173 million of the Company’s debt.

Following the sale of 100% of the equity of McKechnie Vehicle Components for US $1 on 26 November 2008, $2.5 million of cash was loaned to the business, of which US $2.0 million was repaid during the year, as full and final settlement, in exchange for early repayment.

The acquisition of FKI plc, for a total consideration of £970.4 million, increased the size of the Melrose Group by approximately six times. There has been significant ongoing restructuring since acquisition, including the disposal of several non-core businesses. On 22 June 2009 the Company sold its North American operations of the Logistex division for US $40 million and on 28 August 2009 the European operations of the Logistex division were also sold for €30 million. Rhombus and Welland Forge, two smaller businesses, were also disposed of during the first six months of 2009.

Actions were taken during the year to mitigate the impact of economic conditions on the Group’s profitability. Cost bases across all businesses were reviewed and subsequent initiatives implemented to deliver substantial reductions in operating costs. In addition, FKI’s senior management team was reviewed and changes to key positions have been made.

Now that the key restructuring projects are largely complete and non-core businesses disposed of, the Directors’ efforts are focused on identifying the next acquisition opportunity.

The Chairman’s statement on pages 6 and 7, together with the Chief Executive’s review on pages 8 and 9, Business reviews on pages 10 to 18 and Finance Director’s review on pages 19 to 25 describe the principal activities, operations, financial performance, financial position and likely future prospects of the Group. The results of the Group are set out in detail in the financial statements on pages 47 to 51 and in the accompanying notes.

The Company is required by the Companies Act 2006 to set out in this report a fair review of the development and performance of the Group during the year, the position of the Group at the end of the year and a description of the principal risks and uncertainties facing the Group. The information that fulfils these requirements can be found within the Chief Executive’s review, Business reviews, Finance Director’s review and in this Directors’ report. The Finance Director’s review also discusses the key performance indicators that management use.

The subsidiary undertakings principally affecting the profits or net assets of the Group in the year are listed in note 3 to the Melrose PLC UK Company accounts.

Financial results and dividend The Group’s profit for the financial year attributable to members was £79.5 million (2008: loss of £48.3 million). In addition there were minority interest losses of £0.2 million (2008: profit of £0.5 million). The Directors are pleased to recommend the payment of a second interim dividend of 4.8p on 1 April 2010 to Ordinary shareholders on the register at the close of business on 19 March 2010. There will be no final dividend.

It is the intention of the Board to maintain a progressive dividend policy where appropriate going forward.

Directors’ appointment and powersThe Directors of the Company as at the date of this report, together with their biographical details, are given on pages 26 and 27. There were no changes to the Board during the year.

The Company’s Articles of Association (the “Articles”) give the Directors power to appoint and replace Directors. Under the terms of reference of the Nomination Committee, any appointment must be recommended by the Nomination Committee for approval by the Board. The Articles also require Directors to retire and resubmit themselves for election at the first Annual General Meeting (“AGM”) following their appointment. Furthermore, at each AGM one-third of the Directors are subject to retirement by rotation and must therefore submit themselves for re-election.

The Directors are responsible for managing the business of the Company and may exercise all the power of the Company, subject to the provisions of relevant statutes, to any directions given by special resolution and to the Company’s Articles. Powers relating to the issuing of shares and powers to purchase the Company’s own shares are also included in the current Articles and such authorities are submitted for approval by the shareholders at the AGM each year.

Pursuant to section 693 and 701 of the Companies Act 2006 and a special resolution passed at the AGM in 2009, the Company is authorised to purchase its own shares, limited to an aggregate maximum number of 49,758,677 Ordinary Shares. The Company has not purchased any Ordinary Shares pursuant to this authority. The resolutions being proposed at the AGM include a resolution to renew this authority.

Directors’ interests and remunerationInformation on Directors’ beneficial interests, including those of connected persons (within the meaning of section 252 of the Companies Act 2006), in the shares of the Company is shown in the Remuneration report on pages 40 to 43.

Directors’ report


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No Director had a material interest at any time during the year in any contract, other than a service contract, with the Company or any of its subsidiary undertakings.

Directors’ indemnitiesThe Directors have the benefit of an indemnity from the Company in respect of liabilities incurred as a result of their office. This indemnity is provided under the Articles and satisfies the indemnity provisions of the Companies Act 2006.

The Company has taken out an insurance policy in respect of those liabilities for which the Directors may not be indemnified. Neither the indemnity nor the insurance provides cover in the event that a Director is proved to have acted dishonestly or fraudulently.

Directors’ responsibilitiesThe statement of Directors’ responsibilities in relation to the Group consolidated financial statements and the Melrose PLC UK Company accounts is set out on page 44.

Share capitalDetails of the structure of the Company’s share capital and rights attached to the Company’s shares are set out on pages 29 and 30 in compliance with the requirements of section 992 of the Companies Act 2006.

Changes to the share capital of the Company in issue during the year are detailed below:

2007 2009 Ordinary Incentive Incentive Shares Shares Shares

1 January 2009 497,586,779 50,000 –Repurchased from 2007 Incentive Shareholders – (50,000) –Issued to 2009 Incentive Shareholders – – 50,000

31 December 2009 497,586,779 – 50,000

The Ordinary Shares and 2009 Incentive Shares represent 95.2% and 4.8% respectively of the total nominal value of all shares in issue.

Ordinary SharesThe total number of Ordinary Shares in issue on 1 January and 31 December 2009, at a nominal value of 0.2p, was 497,586,779. The Ordinary Shares are traded on the London Stock Exchange.

Incentive SharesOn 14 August 2007, a share incentive scheme was approved (the “2007 Incentive Scheme”) which was due to expire on 31 May 2012. On 14 May 2009, pursuant to a shareholder resolution passed at a General Meeting on that date, the 2007 Incentive Shares of £1 each were repurchased at their nominal value and each holder of 2007 Incentive Shares subscribed for the same number of 2009 Incentive Shares, at the same nominal value. The rights attaching to the 2009 Incentive Shares are identical to those attaching to the 2007 Incentive Shares, with the exception that the Company may pay a dividend on the 2009 Incentive Shares as an alternative to converting them into Ordinary Shares and the holders may not request early conversion in 2010 and/or 2011. The 2009 Incentive Shares were issued to Directors, senior management and Ogier Employee Benefit Trustee Limited, as trustee of the Melrose Employee Benefit Trust.

Consistent with the 2007 Incentive Shares, the 2009 Incentive Shares do not confer a right to be paid a dividend or the right to vote at a general meeting. On winding up, the holders are entitled to participate in the Company’s assets equal to an amount to which they would have been entitled if their 2009 Incentive Shares had crystallised as at the date of winding up. Further details of the 2009 Incentive Shares can be found in the Remuneration report on pages 40 to 43.

At a meeting of the Remuneration Committee on 9 December 2008, 2007 Incentive Shares totalling 1,250 were awarded by the Remuneration Committee, but the Incentive Shares were not allocated to individual employees. These Incentive Shares were allocated to three senior managers on 14 May 2009, as 2009 Incentive Shares. On 27 August 2009, the Remuneration Committee approved the allocation of a further 1,250 of the 2009 Incentive Shares to the same three senior managers.

Further rights and obligations attaching to sharesThe following summary is based on the Company’s current Articles, as adopted at the AGM on 7 May 2008 and amended at the General Meeting on 14 May 2009. Shareholders should refer to the explanatory notes attached to the Notice of AGM, on page 102, for a summary of the changes proposed to be made at this year’s AGM.

VotingOnly Ordinary Shares have voting rights attached. In a general meeting of the Company, subject to the provisions of the current Articles and to any special rights or restrictions as to voting attached to any class of shares in the Company (of which there are currently none):

on a show of hands, every member present in person or by proxy shall have one vote; and

on a poll, every member who is present in person or by proxy shall have one vote for every share of which he is the holder.

No member shall be entitled to vote at any general meeting or class meeting in respect of any shares held by him, if any call or other sum then payable by him in respect of that share remains unpaid. Currently all issued shares are fully paid. The Melrose PLC Employee Benefit Trustee holds 25,279 Ordinary Shares at a nominal value of 0.2p per share, resulting from the crystallisation of the Original Incentive Scheme in August 2007. The FKI plc Employee Benefit Trust holds a further 158,114 Ordinary Shares at a nominal value of 0.2p per share, arising from the Melrose acquisition of FKI plc. The Remuneration Committee may direct how the voting rights of those shares are exercised.

Deadlines for voting rights Full details of the deadlines for exercising voting rights in respect of the resolutions to be considered at the AGM to be held on 13 May 2010 are set out in the Notice of AGM on pages 99 to 102.

Dividends and distributions Subject to the provisions of the Companies Act 2006, the Company may, by ordinary resolution, declare a dividend to be paid to the members, but no dividend shall exceed the amount recommended by the Board. The Board may pay interim dividends and also any fixed rate dividend, whenever the financial position of the Company, in the opinion of the Board, justifies its payment. All dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares.


Directors’ reportcontinued

The Board may deduct from a dividend or other amounts payable to a person in respect of their shares, amounts due from him to the Company on account of a call or otherwise in relation to such shares.

Liquidation Under the current Articles, if the Company is in liquidation, the liquidator may, on obtaining any sanction required by law:

divide amongst the members in kind the whole or any part of the assets of the Company; or

vest the whole or any part of the assets in trust for the benefit of members as the liquidator shall determine.

Transfer of sharesSubject to the Articles, any member may transfer all or any of his shares in any form which the Board may approve, and the transfer shall be executed by or on behalf of the transferor. Subject to the Articles and the requirements of any relevant investment exchange, the Board may, in its absolute discretion, refuse to register a transfer of a share which is not a fully paid share or on which the Company has a lien. The Board may also decline to register a transfer unless the transfer is: (i) in respect of only one class of shares; (ii) in favour of not more than four joint transferees or renouncees; (iii) duly stamped (if required); and (iv) delivered for registration to the registered office, or such other place as the Board may decide, accompanied by the certificate for the shares to which it relates and such other evidence as the Board may reasonably require to prove the title of the transferor.

Substantial shareholdings As at 10 March 2010 the Company has been advised of the following substantial interests in the Ordinary Share capital of the Company:

Shareholder Direct Holding Indirect Holding %

BlackRock Investment Management – 49,381,108 9.92Standard Life Investments 27,076,114 16,457,571 8.75Ameriprise Financial – 38,609,973 7.76Artemis Investment Management 36,392,468 – 7.31Aviva plc & its subsidiaries 15,126,892 15,392,892 6.13Lloyds Banking Group plc 2,719,814 26,277,830 5.83

Corporate GovernanceThe Corporate Governance report is included as a separate report on pages 36 to 39.

Risks and uncertaintiesThe nature of the Group’s portfolio of businesses, which operate across a wide range of specialised engineering markets, diversifies the Group’s risks across a range of customers, suppliers, labour markets and economic conditions. The geographical spread of the businesses also protects against the risk of adverse changes to local economic conditions in any one location.

Financial risks affecting the Group include liquidity risk, finance cost risk, exchange rate risk and commodity cost risk. The financial risk management objectives and policies in relation to the use of financial instruments are described in the Finance Director’s review on pages 19 to 25. The procedures in place for internal control and risk management are explained in the Corporate Governance report on pages 36 to 39. This Directors’ report describes the Group’s management of health and safety, environmental and intellectual property risks. Additionally, any key commercial and economic risks are covered in the Business reviews on pages 10 to 18.

Significant agreements and change of controlWith the exception of the Group’s banking facilities and the 2009 Incentive Share Scheme, there are no other agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid, that are considered to be significant in terms of their potential impact on the business of the Group as a whole on 10 March 2010.

Upon the acquisition of FKI plc, the Group arranged a syndicated £750 million facility, comprising a term loan and revolving credit facility maturing in April 2013. In the event of a change of control of the Company following a takeover bid, the Company and lenders under this facility are obliged to enter into negotiations to determine whether and, if so, how to continue with the facility. There is no obligation for the lenders to continue to make the facility available for more than 30 days beyond any change of control. Failure to reach agreement with parties on revised terms could require an acquirer to put in place replacement facilities.

In the event of a takeover of the Company, the 2009 Incentive Shares convert into Ordinary Shares or an entitlement to a dividend paid in cash, the conversion being based upon the offer price of the Company’s Ordinary Shares as calculated on the date of the change of control of the Company. If part or the entire offer price is not in cash, the Remuneration Committee will determine the value of the non-cash element, having been advised by an investment bank of repute that such valuation is fair and reasonable.

Product and employer’s liability claimsOngoing risks in relation to potential future liabilities arising from product, disease (including asbestos), employer’s liability and workers’ compensation claims have been assessed using external actuarial projections for material exposures and historic claims experience analysis for less significant exposures. Actuarial projections and claims history experience are analysed by management and key points are discussed with the Board. Provisions are recognised in the Group’s Balance Sheet where appropriate.

A number of businesses have ISO 9001 and ISO 16949 certifications for their quality management systems, which also helps to ensure their products and processes are of a recognised quality, reducing the risk of product claims.


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Key customersA review of key customers has been conducted across the Group. The loss of any one key customer would not have a material effect on the Group’s results, however the loss of a key customer could be material to an individual business.

Payments to suppliers Given the international nature of the Group’s operations, there is no standard protocol for the Group in respect of payments to suppliers. Operating businesses are responsible for agreeing the terms and conditions of their transactions with suppliers. These arrangements are adhered to, provided that suppliers meet their contractual commitments. The Company, as a holding company, did not have any material amounts owing to trade creditors at 31 December 2009.

Intellectual propertyThe Company values intellectual property (“IP”) and where appropriate seeks protection and enforcement of its rights over IP. Due to the varying types of IP owned or licensed across the Group, each business is responsible for the protection and enforcement of its IP rights and this is managed on a decentralised basis through the use of external advisors and the support of the Company. The Group conducts internal IP audits periodically.

Employment policiesThe Group is managed on a decentralised basis and each business is responsible for the adoption of employment policies and practices applicable to the size and nature of that business. This is appropriate due to the diversified nature of the Group’s businesses and allows the businesses to meet their own local regulatory requirements, respond to changes in the environment in which they operate and to retain identity while benefiting from being part of a larger group.

The Group recognises its responsibilities for the fair treatment of all its employees in accordance with legislation applicable to the territories within which it operates. Having regard to their skills and abilities, the Group gives full and fair consideration to applications for employment received from disabled persons. Further, and so far as particular disabilities permit, the Group will give employees disabled during their period of employment continued employment in the same job or, if this is not practicable, a suitable alternative job. Equal opportunities for appropriate training, career development and promotion are available to all employees regardless of any physical disability, gender, religion, race, nationality, sexual orientation or age.

Employee involvement, consultation and developmentThe Directors attach great importance to good labour relations, employee involvement and development. The nature of the Group’s activities places the responsibility for employment practices with local management, in a manner appropriate to each business.

A culture of clear communication and employee consultation is inherent in all businesses. Employee briefing sessions are held on a regular basis at each unit to communicate strategy, key changes, financial results, personnel achievements and other important issues affecting operations. Regular appraisals, notice boards, intranet sites and newsletters are also used to communicate with employees.

Various key performance indicators (“KPIs”), including absenteeism, lateness and employee turnover are monitored on a regular basis by the businesses. Any concerns or adverse trends are responded to in a timely manner.

Training is actively encouraged, with extensive training available to all staff to ensure a high standard of skill is maintained across the Group. Cross-training programmes are also in place at a number of units. The importance of training extends beyond on the job training and focuses on enhancing personal development. For example the Truth business subsidises further university education and master degree programmes and a number of businesses offer external after hours training courses on subject matters unrelated to current job requirements. Apprenticeship programmes are in place at the majority of sites, assisting with succession planning where there is an ageing workforce. Innovative thinking is encouraged across the Group and a number of the Dynacast business units have established Continuous Improvement Committees, which recognise and reward employees for ideas which are realised and implemented to improve operations.

A range of social events are held across the businesses throughout the year in recognition of employees’ contributions and a number of broad-ranging wellbeing programmes are also in place.

A significant number of employees are members of unions and some businesses operate works councils, both of which are used for consultation and dissemination of information as appropriate.

The Directors have monthly meetings with divisional senior management and visit the sites on an ad-hoc basis to communicate with the wider Group. Financial results for the half year and full year are discussed with the Group’s senior management team and Group developments are communicated to the businesses as appropriate. Employee involvement in and commitment to the Group’s profitability is encouraged through appropriate bonus schemes.

PensionsCompanies within the Group operate various pension schemes around the world. The following defined benefit schemes are material to the Group:

As at 31 December 2009

Assets Liabilities Number of Name of scheme Status £m £m members

FKI UK Closed to new members 508.7 618.8 10,953Pension in October 2001; open Scheme for future accrual on a final salary basisFKI US Closed to new members 174.4 191.4 8,532 Pension Plan in April 2003 and for future accrual in January 2009 McKechnie UK Closed to new members 128.1 140.2 3,362 Pension Plan in May 2003 and for future accrual in June 2005



The FKI UK Pension Scheme (“FKI UK Scheme”) is a UK defined benefit pension scheme with FKI plc as its principal employer. The primary liability for funding rests with the participating employers, who currently pay £18.0 million annually into the FKI UK Scheme. This was expected to remove the funding deficit by 31 December 2015, when the contribution levels were last formally assessed as at 31 December 2005. The Company and Trustees have reviewed the funding of the FKI UK Scheme as part of the actuarial valuation as at 31 December 2008 and discussions to finalise contributions are ongoing between the Company and the Trustees.

The FKI US Pension Plan (“FKI US Plan”) is a defined benefit pension scheme covering several of FKI’s US business units. The primary liability for funding the FKI US Plan rests with the participating employers. The Company and Trustees have reviewed the funding requirements of the FKI US Plan, based on the 1 January 2009 actuarial valuation and no pension contributions are required, as it is expected that the deficit will be eliminated over time via excess asset returns. Unlike the UK pension plans, deferred member liabilities do not increase by inflation each year.

The McKechnie UK Pension Plan (“McKechnie UK Plan”) is a UK defined benefit pension scheme with McKechnie Limited as its principal employer. The primary liability for funding rests with the participating employers, which currently contribute £6.1 million annually into the McKechnie UK Plan and have agreed to meet the reasonable administration expenses and the Pension Protection Fund Levy up to 30 April 2010. The Company has guaranteed the funding of the McKechnie UK Plan on an ongoing basis. The Company and Trustees reviewed the funding of the McKechnie UK Plan as part of the actuarial valuation as at 31 December 2008 and discussions to finalise contributions are ongoing between the Company and the Trustees.

Health and safetyThe Directors seek to minimise health and safety risks to the Group’s employees by promoting effective management of the Group’s activities.

Policies are set by each business in accordance with local health and safety legislation and most units strive to achieve best practice. The Turbogenerators business in the Czech Republic has ISO 18001 certification for Occupational Health and Safety and a number of operations are currently in the process of performing gap analysis of current processes to determine the changes required to obtain this certification.

Health and safety is a key focus for divisional management and there are active programmes in place to provide substance to the written policies. Detailed health and safety plans are set by businesses each year to determine annual targets and initiatives. Health and safety committees are established at all businesses, which consist of both management and manufacturing personnel, who meet on a monthly basis. The committees are responsible for reviewing reported incidents, monitoring incident trends and ensuring corrective measures are implemented when accidents occur or safety hazards are noted. All incidents, whether or not they are deemed reportable under local legislation, are given due attention by the committee and divisional management require detailed reporting of all incidents and prompt reaction to issues.

A variety of KPIs are measured by the various health and safety committees across the Group, with all businesses monitoring the number of incidents and lost time injuries at a minimum, some expanding their KPIs to determine frequency and severity of incidents. The Company is in the process of reviewing the data already collected across the Group to assess appropriate standardised measures for the Group as a whole.

Extensive work has been undertaken by the businesses to ensure high levels of health and safety standards are maintained across the Group. The businesses strive for continuous improvement and numerous projects have taken place throughout the year to further enhance the quality of the working environment for employees, such that the majority of KPIs have improved when compared to 2008. Initiatives include implementation of stretching programmes at Truth and Acco which have seen notable reductions in the frequency of back and other strain injuries; health and safety assessments at Bridon which identify training needs and ensure employees keep up to date with latest procedures; improved use of notice boards to communicate incidents and promote awareness of specific hazards and risks; increased use of automatic retractable cables rather than manually wound cables to reduce trips and falls; and the installation of more automated lifting machines at a number of sites to reduce back-related injuries. Businesses have further initiatives planned for 2010, including improved analysis across many units of situations which could have resulted in an accident (“near misses”) and the introduction of wellbeing programmes by some units.

Premises are toured on a monthly basis by the respective health and safety committees to ensure compliance with policies and to identify any potential hazards for which counter measures can be implemented. Recommendations are followed up as part of the agenda at the next committee meeting. Additionally, operations are audited by both the safety committees and external auditors at least annually and reports of performance and recommended improvements are prepared. The safety committee is responsible for ensuring recommendations are implemented and most businesses use the audit reports as a base for their annual health and safety plans.

In order to ensure the policies in place are effective in promoting good health and safety, all divisions are required to report to the Board on health and safety matters on a monthly basis and to notify the Board of any reportable incidents. Health and safety is also covered at every meeting of the Board.


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The environmentThe Group continues to recognise the importance of its environmental responsibilities and is committed to ensuring that its operations have minimum adverse effect upon the environment and that employees are aware of their role in safeguarding the future of the environment.

Business units seek to actively improve their processes and local policies are designed to reduce any damage that might be caused by the Group’s activities, with many units implementing policies in line with best practice. In seeking best practice standards, a number of business units have achieved the high standards required to obtain ISO 14001 Environmental Management Systems certification and two further units are currently undergoing gap analysis to ensure certification in 2010. Policies and procedures at Dynacast Singapore and Malaysia also meet the high standards required to be “Green Partners” for Sony, which are seen to be stricter than those applied by ISO 14001 and Truth was awarded the first Annual Green Award from Window and Door magazine. In addition, the UK subsidiaries comply with the UK Packaging Waste Regulations and REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) requirements as appropriate.

Businesses understand the importance of monitoring the impact of their operations on the environment and measure a range of KPIs including energy consumption, carbon dioxide (“CO2”) emissions, water consumption, waste disposal, recycling and volatile organic compound emissions. KPIs are used to plan areas for improvement each year. Consistent with the ethos of continuous improvement across many facets of the Group, the businesses are pleased to have implemented further initiatives during the year to reduce energy and water consumption. Capital expenditure was invested in new energy efficient machinery and lighting, automated lighting systems, installation of water flow meters and automatic close valves and a number of businesses moved to using bore water rather than town water for some processes. Dynacast went a step further and its new factory in Singapore was built with a transparent roof, in order to significantly reduce the reliance on artificial lighting. The company is expected to replicate this design for any new plants built in the Asia Pacific region.

Looking forward to 2010, Turbogenerators and Acco are moving to replace solvent-based paints with water-based paints, as already used by most other units. Bridon is assessing its current cleaning processes to reduce the levels of hydrochloric acid used and some of the Dynacast businesses are replacing many of their traditional cleaning processes to dry cleaning methods (such as shot blasting), in order to reduce the use of chemicals and soap. The Group will continue its focus on recycling, use of renewable energy and safe removal of hazardous waste across all operations.

The introduction of the CRC Energy Efficiency Scheme (“CRC”), a new mandatory climate change and energy saving scheme introduced in the UK, will also impact the Group’s UK operations from 2010. CRC is part of the UK’s strategy for improving energy efficiency and reducing CO2 emissions, as set out in the Climate Change Act 2008, and requires UK companies to purchase carbon allowances based on their energy usage. The Company

has been proactive during 2009 in preparing for the scheme’s implementation, appointing external consultants as the Group’s CRC advisors. A CRC training workshop was held in September 2009 for all UK businesses units, to communicate the scheme’s requirements and the importance of CRC to the Group. Preparation for the registration process is well advanced and the Group is ready for registration which commences in April 2010.

Environmental liabilitiesThe environmental laws of various jurisdictions impose obligations to remediate contaminated sites both currently and previously owned by the Group. All environmental risks are closely managed by external environmental specialists in conjunction with management and remediation is undertaken as appropriate.

Environmental liabilities are required to be notified to the Company Secretary and the Board are updated on environmental matters at each Board meeting. Costs incurred in meeting these obligations are monitored and provisions are reviewed by the Board and recognised as appropriate.

Research and developmentUsing both internal expertise and external consultants, the Group continually invests in research and development for the design of new products, processes and technology. New products were launched across the Group this year and continued investment in new technology realised significant cost savings from streamlining production. Due to the nature of the research and development that occurred in 2009, the associated costs were expensed during the year rather than being capitalised, in line with the Group’s accounting policies on page 55. The Group will continue to invest in research and development that has a suitable return.

Social responsibilityThe Group recognises the importance of social, environmental and ethical matters and the Directors endeavour to take into account the interests of all stakeholders, including investors, employees, customers, suppliers and business partners when managing the businesses within the Group.

The Group regards employee training and advancement as an essential element of industrial relations. Disputes and days lost through strike action are negligible. Many units have a social and ethical policy, with a senior manager holding responsibility for communicating and implementing it. Such policies apply and extend local laws and standards which prohibit discrimination and exploitation.

The majority of the businesses provided community support during the year with efforts ranging from charitable donations to voluntary assistance and fund raising. Support is given to local schools by offering traineeships and work experience to students.

The Company will continue to invest in its businesses during its ownership, enhancing their reputation within the markets and communities in which they operate.

Charitable and political donationsThe Group paid £8,757 (2008: £8,750) to UK charities during the year, principally to local charities serving the communities in which the Group operates. There were no political donations made during the year (2008: nil).



AuditorsUnder the Companies (Audit, Investigation and Community Enterprise) Act 2004, auditors have the right to access all information necessary for the performance of their duties as auditor and the duties of Directors in this regard are clarified.

So far as each Director is aware, there is no relevant audit information of which the auditors are unaware and the Directors have taken all the steps which they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

Deloitte LLP have expressed their willingness to continue in office as auditors. Accordingly, a resolution will be proposed at the AGM of the Company to re-appoint Deloitte LLP as auditors of the Company and to authorise the Directors to determine their remuneration.

Going concernThe Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business reviews on pages 10 to 18. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Director’s review on pages 19 to 25. In addition, notes 19 and 24 to the consolidated financial statements include the Group’s policies and processes for managing its capital, exposures to liquidity risk and financial risk management objectives, as well as details of its financial instruments and hedging. Credit risk exposure is discussed in note 16 and note 24 to the consolidated financial statements.

The Group prepares regular business forecasts and monitors projected facility headroom and compliance with its banking covenants, which are reviewed by the Board. Forecasts are then adjusted for sensitivities which address the principal risks to which the Group is exposed, such as fluctuations in exchange rates and best estimates of the possible impact of the macroeconomic environment on the Group’s underlying trading results. Consideration is then given to the potential actions available to management to mitigate the impact of one or more of the sensitivities.

Taking all this into consideration, the Group should be able to operate within the level of its current facility and remain covenant compliant for the foreseeable future, being a period of at least twelve months from the date of approval of the Annual Report.

After making appropriate enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and financial statements.

Annual General MeetingThe AGM of the Company will be held at Barber-Surgeons’ Hall, Monkwell Square, Wood Street, London, EC2Y 5BL at 11.00am on 13 May 2010.

Resolutions dealing with the following special business will be proposed at the AGM:

Resolution 7 will seek shareholder approval to renew the Directors’ authority to allot shares or grant rights to subscribe for or convert any securities into shares pursuant to section 551 of the Companies Act 2006 (the “section 551 authority”). The authority contained in paragraph (A) of the resolution will be limited to an aggregate nominal amount of £331,724, representing approximately one-third of the Company’s issued Ordinary Share capital as at 10 March 2010.

In line with guidance issued by the Association of British Insurers, paragraph (B) of this resolution would give the Directors authority to allot shares or grant rights to subscribe for or convert any securities into shares in connection with a rights issue up to an aggregate nominal amount equal to £663,449, representing approximately two-thirds of the Company’s issued Ordinary Share capital as at 10 March 2010, as reduced by the nominal amount of any shares issued under paragraph (A) of this resolution.

The Company does not hold any treasury shares.

Resolution 8 will seek to renew the authority conferred on the Board to allot equity securities of the Company (or sell any shares which the Company may elect to hold in treasury) for cash pursuant to section 570 of the Companies Act 2006 (the “section 570 authority”) without first offering them to existing shareholders in proportion to their existing shareholdings. It is limited to allotments or sales in connection with pre-emptive offers, subject to any arrangements that the Directors consider appropriate to deal with fractions and overseas requirements, and otherwise up to a maximum nominal value of £49,758, representing approximately 5% of the Company’s issued Ordinary Share capital as at 10 March 2010, which is in accordance with the relevant guidelines for the Company.

If approved, the section 551 authority and the section 570 authority will expire at the conclusion of next year’s AGM or, if earlier, at the close of business on 30 June 2011. The Directors have no present intention of exercising the section 551 authority or the section 570 authority.

Resolution 9 will seek to renew the authority conferred on the Company to purchase its own shares pursuant to sections 693 and 701 of the Companies Act 2006. This authority is limited to an aggregate maximum number of 49,758,677 Ordinary Shares, representing approximately 10% of the Company’s issued Ordinary Share capital as at 10 March 2010. This power will expire at the conclusion of next year’s AGM or, if earlier, at the close of business on 30 June 2011. The maximum price which may be paid for an Ordinary Share will be an amount which is not more than 5% above the average of the middle market quotation for an Ordinary Share as derived from the London Stock Exchange Daily Official List. The Directors have no present intention of exercising all or any of the powers conferred by this resolution and will only exercise their authority if it is in the interests of shareholders generally.


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Resolution 10 will seek to adopt new Articles of Association (the “New Articles”) in order to update the Company’s current Articles, primarily to take account of the coming into force of the Companies (Shareholders’ Rights) Regulations 2009 (the “Shareholders’ Rights Regulations”), the implementation of the last parts of the Companies Act 2006 and amendments to the Uncertificated Securities Regulations 2001.

The principal changes introduced in the New Articles are summarised in the explanatory notes to the Notice of AGM on page 102. Other changes, which are of a minor, technical or clarifying nature, which merely reflect changes made by the Companies Act 2006, the Shareholders’ Rights Regulations or the Uncertificated Securities Regulations 2001, or which conform the language of the New Articles with that used in the model articles for public companies produced by the Department for Business, Innovation and Skills, have not been noted in the explanatory notes. A copy of the New Articles showing all the changes to the current Articles is available for inspection, as noted on page 101 of this document.

Resolution 11 will seek shareholder approval to allow the Company to continue to call general meetings (other than AGMs) on 14 clear days’ notice. Changes made to the Companies Act 2006 by the Shareholders’ Rights Regulations have increased the notice period required for general meetings of the Company to 21 days unless shareholders approve a shorter notice period (subject to a minimum period of 14 clear days). AGMs will continue to be held on at least 21 clear days’ notice.

The approval will be effective until the Company’s next AGM, when it is intended that a similar resolution will be proposed. The changes to the Companies Act 2006 mean that in order to be able to call a general meeting on less than 21 clear days’ notice, the Company must make electronic voting available to all shareholders for that meeting.

RecommendationsThe Board believes that each of the resolutions to be proposed at the AGM is in the best interests of the Company and its shareholders as a whole. Accordingly, the Directors unanimously recommend that members vote in favour of all of the resolutions proposed, as they intend to do in respect of their own beneficial holdings.

Disclosures in the Directors’ reportThe Corporate Governance report and Business reviews and Finance Director’s review form part of the Directors’ report.

Approved by the Board of Directors and signed on its behalf by

Garry BarnesSecretary 10 March 2010


Statement of complianceThe Company supports the principles contained in the 2008 Combined Code on Corporate Governance that was issued by the Financial Reporting Council (“the Combined Code”).

The Board is accountable to the Company’s shareholders for good governance. Throughout the year ended 31 December 2009, the Company has complied with the provisions of section 1 of the Combined Code and with the requirements of the new Disclosure and Transparency Rules (“DTR”) on audit committees and corporate governance statements. The statements below describe how the Company has applied the principles identified in the Combined Code and DTR directives.

The BoardAs at 31 December 2009 the Board comprised seven members, who also served throughout the year. The members of the Board include the four executive Directors: Christopher Miller (Chairman), David Roper (Chief Executive), Simon Peckham (Chief Operating Officer) and Geoffrey Martin (Group Finance Director); and the three non-executive Directors: Miles Templeman (senior non-executive Director), Perry Crosthwaite and John Grant.

The Board is responsible to shareholders for the effective and proper management and control of the Company and has a formal schedule of matters reserved for its decisions. Its primary roles are to determine and review Company strategy and policy, consider acquisitions and disposals, assess requests for major capital expenditure, review trading performance, ensure adequate funding is available and appropriate personnel are in place, maintain sound internal control systems, report to shareholders and give consideration to all other significant financial matters. This process is undertaken in conjunction with senior management, who in turn are responsible for the day-to-day conduct of the Group’s operations and for reporting to the Board on items of significance and the progress against objectives. The Board meets regularly during the year as well as on an ad-hoc basis as required by time critical business needs. There were four scheduled Board meetings held during the year and the attendance of each of the Directors is shown on page 38.

The Board believes that the Directors possess diverse business experience in areas complementary to the activities of the Company. Biographies of the Directors are shown on pages 26 and 27. These biographies identify any other appointments held by the Directors. The only executive Director to hold non-executive Director appointments elsewhere is Mr Christopher Miller, who is Chairman of TMO Renewables Limited and is allowed to retain the remuneration he receives from that appointment.

The terms and conditions of the executive Directors’ service contracts and the non-executive Directors’ appointments are available for inspection at the Company’s registered office. The non-executive Directors’ appointment letters are also available on the Company’s website: www.melroseplc.net.

In accordance with the provisions of the Combined Code, consideration has been given to the independence of all the non-executive Directors and the Board considers all the non-executive Directors to be independent. The non-executive Directors are not entitled to any bonus or shares under the 2009 Incentive Share Scheme.

Performance of the Board and each Committee is evaluated annually. The Chairman has held meetings with the Directors, including the senior independent non-executive Director, Mr Miles Templeman, to discuss the performance of individual executive Directors and the Board as a whole. It was considered that the individual Directors and the Board as a whole were operating effectively. Directors determine whether there are any training requirements by completing an evaluation questionnaire during the year that is designed to identify any failures in the performance of the Board and each of its Committees. The findings of the evaluations were reviewed by the Company Secretary and feedback was provided to the Board.

In accordance with the Company’s Articles of Association, one third (or the number nearest to but not less than one third) of Directors are required to retire and submit themselves for re-election at each Annual General Meeting of the Company. It is the policy of the Board that non-executive Directors are appointed for an initial term of three years, following which their appointment will be reviewed.

The Directors proposed for re-election at the Annual General Meeting on 13 May 2010 are Mr David Roper, Mr Miles Templeman and Mr John Grant. The Board and Nomination Committee have carefully considered the time commitments required and the contribution made by each Director. Both the Nomination Committee and the Board are of the belief that the performance of each executive and non-executive Director continues to be effective and that each Director demonstrates commitment to his role.

All Directors receive a formal and tailored induction shortly after their appointment. Directors are advised that they have access to the advice and services of the Company Secretary, Garry Barnes, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. The Board may seek independent legal and financial advice in the furtherance of its duties, at the Company’s expense.

A pack of briefing papers and an agenda are provided to each Director in advance of each scheduled Board or standing Committee meeting. The Directors are able to seek further clarification and information on any matter from any other Director or employee of the Group whenever necessary. Decisions are taken by the Board in conjunction with the recommendations of its Committees and advice from external consultants, advisors and senior management.

Chairman and Chief ExecutiveThe roles and responsibilities of the Chairman of the Board and the Chief Executive of the Company are segregated as required by Board policy. The Chairman alone is responsible for the leadership of the Board and for ensuring effective communication with shareholders together with the other executive Directors. The Chief Executive is responsible for strategic direction and decisions involving the day-to-day management of the Company. These respective responsibilities are set out in writing and have been approved by the Board, who consider that the respective roles and responsibilities are clearly understood by both individuals and by the Board as a whole.

Corporate Governance report


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Committees of the BoardIn accordance with the provisions of the Combined Code, the Board has three standing Committees: the Audit, Remuneration and Nomination Committees; each of which includes the three independent non-executive Directors. The duties of the Committees are set out in formal terms of reference. These are available from the Company Secretary and on the Company’s website, www.melroseplc.net. Membership of the Committees is shown above. The Company Secretary acts as Secretary to each of the Committees.

Audit CommitteeThe Audit Committee currently comprises the three independent non-executive Directors, and is chaired by Mr Miles Templeman. Each member of the Audit Committee brings relevant financial experience from senior executive and non-executive positions as described in their biographies on pages 26 and 27.

The Audit Committee invites the Group Finance Director, the Head of Financial Reporting and senior representatives of the external and internal auditors to attend meetings as appropriate to the business being considered. In addition, the Audit Committee has the right to invite any other employees to attend meetings where this is considered appropriate. The Audit Committee is expected to meet not less than three times a year and the Audit Committee met three times during 2009. The attendance of its members, along with the Group Finance Director, is shown in the table on page 38.

The function of the Audit Committee is to monitor and review the effectiveness of the Group’s internal control systems, accounting policies and practices, financial reporting process, risk management procedures and compliance controls. Integrity of the Company’s financial statements is monitored through the review of the Preliminary Results, Interim Statement and Annual Report by the Committee before they are presented to the Board for approval.

The Audit Committee is also responsible for the development, implementation and monitoring of the Company’s policy on external audit and for overseeing the objectivity and effectiveness of the auditors. The Company’s external auditors are recommended for appointment and re-appointment by the Audit Committee which also assesses the appropriateness of the scope of audit work performed and provides recommendations in respect of their remuneration. The Audit Committee receives regular reports from the Group’s external auditors.

The Audit Committee has a policy on the engagement of the external auditor for the supply of non-audit services and the Committee is aware of the audit and non-audit services (including taxation advice) which have been provided by Deloitte LLP during 2009. A significant proportion of the non-audit services related to non-recurring work in connection with the provision of tax advisory services and the disposal of the Logistex businesses. The provision of non-audit services was considered to be appropriate, given the external auditors’ depth of knowledge of the affairs and financial practices of the Group. The Audit Committee is satisfied that, notwithstanding non-audit work, Deloitte LLP have retained objectivity and independence during the year. The Audit Committee will continue to monitor its policy in this regard and accepts that non-audit work should be controlled to ensure that it does not compromise the independence of the auditors.

Deloitte LLP were appointed in 2003. At each year end Deloitte LLP submits a letter setting out how they believe their independence and objectivity have been maintained and they are required to rotate the audit partners responsible for the Group and subsidiary audits every 5 years. The Group’s audit signing partner will change as part of that rotation process in 2010. There are no contractual obligations that restrict the Group’s capacity to recommend a particular firm for appointment as auditor.

The BoardChristopher Miller (Executive Chairman)

David Roper (Chief Executive)Simon Peckham (Chief Operating Officer)Geoffrey Martin (Group Finance Director)

Miles Templeman (Senior non-executive Director)Perry Crosthwaite (non-executive Director)

John Grant (non-executive Director)

Remuneration CommitteePerry Crosthwaite (Chairman)

Miles TemplemanJohn Grant

Nomination CommitteeMiles Templeman (Chairman)

Perry CrosthwaiteJohn Grant

Christopher Miller

Audit CommitteeMiles Templeman (Chairman)

Perry CrosthwaiteJohn Grant


Corporate Governance reportcontinued

Following the acquisition of FKI plc in July 2008, the size and complexity of the Group is such that the implementation of an internal audit programme has been deemed appropriate. BM Howarth, an external firm that provides internal audit services, were appointed as the Group’s internal auditors on 3 June 2009. A rotation programme is in place, such that every unit will have an internal audit at least once every three years, with the largest sites reviewed at least once every two years. The internal auditors’ remit includes assessment of the effectiveness of the internal control systems and review of the businesses’ balance sheets for compliance with the Group’s accounting policies. A report of key findings and recommendations is presented to the Finance Director, Head of Financial Reporting and Operations Controller, who are responsible for monitoring divisional management’s response to these findings.

Review of the internal audit process and scope of work covered by the internal auditors is the responsibility of the Audit Committee, to ensure their objectives, level of authority and resources are appropriate for the nature of the businesses under review. A report of significant findings is presented by the internal auditors to the Committee at each meeting and implementation of recommendations by the Board is followed up at the subsequent Committee meeting.

Remuneration CommitteeThe Remuneration Committee currently comprises the three independent non-executive Directors and is chaired by Mr Perry Crosthwaite.

The function of the Remuneration Committee is to make recommendations to the Board on the overall framework and policy for the remuneration of the executive Directors and other senior management, including performance related remuneration. In developing its recommendations, the Committee considers Schedule 8 of Part 15 of the Companies Act 2006.

The Remuneration Committee is expected to meet not less than twice a year and during 2009 the Remuneration Committee met three times. The attendance of its members is shown in the table on this page. The report to shareholders on how Directors are remunerated, together with details of individual Directors’ remuneration, is shown in the Remuneration report on pages 40 to 43.

Nomination CommitteeThe Nomination Committee currently comprises Mr Christopher Miller and the three independent non-executive Directors and is chaired by Mr Miles Templeman.

The Nomination Committee reviews the structure, size and composition of the Board, particularly in relation to its balance of skills, experience and knowledge, and seeks to ensure that both executive and non-executive Directors have the necessary skills and attributes for the future success of the Company. The Nomination Committee reviews succession plans for the Directors and makes recommendations to the Board on membership of the Board and of its Committees. The Nomination Committee retains external search consultants as appropriate.

The Nomination Committee is expected to meet not less than twice a year and during 2009 the Nomination Committee met three times. The attendance of its members is shown in the table on this page.

Attendance at meetingsThe table below shows the attendance of each of the Directors at the scheduled and significant meetings of the Board and its standing Committees held during the year. The quorum necessary for the transaction of business by the Board and each of its standing Committees is two. Briefing papers and meeting agendas are provided to each Director in advance of each meeting. Decisions are taken by the Board in conjunction with the recommendations of its Committees and advice from external advisors and senior management as appropriate. The representations of any Director who is unable to attend a meeting of the Board or a standing Committee are duly considered by those Directors in attendance.

Board Audit Remuneration Nomination

Number of meetings (1) 4 3 3 3

Christopher Miller 4 n/a n/a 3David Roper 4 n/a n/a n/aSimon Peckham 4 n/a n/a n/aGeoffrey Martin 4 3(2) n/a n/aMiles Templeman 4 3 3 3Perry Crosthwaite 3 3 3 3John Grant 4 3 3 3(1) In addition, ad-hoc meetings are held from time to time which are attended by a quorum

of Directors and are convened to deal with specific items of business. (2) Mr Martin attends by invitation.

Internal control and risk managementObjectives and policyThe objective of the Directors and senior management is to safeguard and increase the value of the business and assets of the Group. Achievement of this objective requires the development of policies and appropriate internal control frameworks to ensure the Group’s resources are managed properly and any key risks are identified.

The Board is ultimately responsible for the Group’s overall system of internal control and for reviewing its effectiveness, while the role of management is to implement the policies set by the Board in respect of risk management and controls. The Directors recognise that the systems and processes established by the Board are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and cannot provide absolute assurance against material financial misstatement or loss.

The Board is committed to satisfying the internal control guidance for Directors set out in the revised version of the Turnbull Guidance on Internal Control. In accordance with this guidance, there is an ongoing process, regularly reviewed by the Directors, for identifying, evaluating, managing and mitigating (where possible) the significant risks faced by the Group. This process for reviewing the Group’s internal controls is consistent with prior years and has been in place throughout the 2009 financial year and up to the date of approval of the Annual Report.


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The Group has policies which address a number of key business risks, including financial, treasury, health and safety and environmental risks. The Group’s financial risk management objectives and policies are described in the Finance Director’s review on pages 19 to 25. Other key risks which could adversely affect the Group are described in the Chief Executive’s review on pages 8 and 9; Business reviews on pages 10 to 18; and Directors’ report on pages 28 to 35. These policies and further detailed business unit specific policies are made available to employees through manuals and also via specific employee briefings and other communications, as appropriate.

Managing and controlling riskThe Group operates on a decentralised basis and the Directors have established an organisational structure with clear reporting procedures, lines of responsibility and delegated authority. Divisional senior management, plant managers and financial controllers have been delegated responsibility by the Board for the establishment and implementation of detailed control systems as appropriate for their business.

An established programme of regular review is in place at the businesses and a culture of continuous improvement is encouraged by the Directors through regular meetings with senior management, review of operating performance and progress against business plans. The ongoing process of review provides assurance that the control environment is operating as intended.

The Audit Committee also monitors the effectiveness of the internal control processes implemented across the Group, through review of the key findings presented by the external and internal auditors and discussions with senior management on an ad-hoc basis. The Board is responsible for considering the Audit Committee’s recommendations in respect of internal controls and risk management and ensuring implementation by management of those recommendations it deems appropriate for the business.

Internal financial controlsThe Group has a comprehensive system for assessing the effectiveness of the Group’s systems of internal financial controls, including strategic business planning and regular monitoring and reporting of financial performance. A detailed annual budget is prepared by senior management and thereafter is reviewed and formally adopted by the Board. The budget and other targets are regularly updated via a rolling forecast process and regular business review meetings are held involving senior management, to assess the divisional and overall Group performance. The results of these reviews are in turn reported to and discussed by the Board at each meeting.

As discussed in the Audit Committee section on pages 37 and 38 of this report, BM Howarth has been appointed as the Group’s internal auditors. Fifteen business units have been visited during the year and the Directors are pleased to report that there were no material deficiencies and the main recommendations presented in the internal auditors’ reports of key findings have now been, or are in the process of being implemented. A further nineteen business units are planned for review during 2010.

The Board confirms that, from the review of internal controls, it has not determined any significant failings or weaknesses that it considers require remedial action. The Board also confirms that it has not been advised of any material weaknesses in the internal control systems that relate to financial reporting.

Whistleblowing and bribery and corruption policiesThe Group has a whistleblowing policy in place which enables individuals to make protected disclosures to their divisional human resources manager, Group Company Secretary or senior independent non-executive Director if they have concerns about possible improprieties in financial reporting or other malpractices within their business.

A bribery and corruption policy is also in place for the Group that requires all employees to act with honesty, integrity and transparency and conduct themselves in a lawful, ethical and professional manner. Under the policy employees are not to offer or solicit any bribe, or similar inducement, and are required to report any offer of a bribe or unorthodox payment.

Communications with shareholdersPrincipally via the executive Directors, the Company seeks to build on a mutual understanding of objectives with its institutional shareholders through regular meetings and presentations following announcements of Annual and Interim Results. The senior independent non-executive Director, Mr Miles Templeman, is available to meet institutional shareholders should there be unresolved matters they wish to bring to his attention. The views of key analysts and major shareholders are communicated back to the Board directly by individual Directors and via the Company’s brokers, ensuring all members of the Board develop an understanding of the views of major shareholders.

Corporate information is available on the Company’s website, www.melroseplc.net.

The Board welcomes the attendance of shareholders at the AGM and the attendance of all Directors is required. The number of proxy votes cast for and against each of the resolutions proposed is announced at the AGM and a summary will be available shortly after the AGM on the Company’s website.

By order of the Board

Garry BarnesSecretary10 March 2010


Introduction and complianceThis report has been prepared by the Remuneration Committee on behalf of the Board in accordance with the requirements of Schedule 8 of Part 15 of the Companies Act 2006 and the Listing Rules of the Financial Services Authority. A resolution inviting shareholders to approve the report will be put to the Annual General Meeting on 13 May 2010.

Biographies of the Directors are shown on pages 26 and 27. These biographies identify any other significant appointments held by the Directors.

Unaudited information:Remuneration CommitteeThe Company has established a Remuneration Committee which is chaired by Mr Perry Crosthwaite, an independent non-executive Director. Mr Miles Templeman and Mr John Grant, the other two independent non-executive Directors, complete the Committee.

The terms of reference of the Remuneration Committee are posted on the Corporate Governance section of the Company’s website www.melroseplc.net and are also available from the Company Secretary. Page 38 of the Corporate Governance report sets out the function of the Remuneration Committee.

Remuneration policy The remuneration policy in place for the current and subsequent financial years is described below.

Executive DirectorsThe Board establishes the remuneration policy based on the recommendations of the Remuneration Committee. The remuneration policy requires the package offered to be sufficient to attract, retain and motivate executive Directors and senior management of a suitable quality, but not to be more than is necessary for this purpose. It is intended that performance related pay should comprise a significant proportion of the total remuneration package.

Non-executive DirectorsThe executive Directors are responsible for proposing the non-executive Directors’ fees. In proposing such fees they take account of fees paid to non-executive Directors of similar sized listed companies within the Company’s listing sector. Any decision on fee changes is taken by the executive Directors as a whole and non-executive Directors do not take part in discussions on their own remuneration. Non-executive Directors do not receive other taxable benefits or pension contributions from the Group.

The remuneration package Remuneration packages are reviewed annually, generally effective from 1 January. The Remuneration Committee and its advisors use a number of surveys of the employment market from which to obtain remuneration data.

The remuneration package for all executive Directors comprises base salary and benefits, annual bonus, long term incentive arrangements and pension contributions as described below. Some senior employees of the Group are also entitled to bonuses under the arrangements as noted.

Base salary and benefitsBase salaries are determined with reference to the performance of the individual and consideration of current market salaries for an equivalent role, based on independently sourced market information. All executive Directors’ base salaries are reviewed by the Remuneration Committee prior to the beginning of each year and when an individual changes position or responsibility. Base salaries for 2009 were reviewed in December 2008, when it was agreed that all executive Directors’ base salaries would remain unchanged from the base salary levels which were in effect from 1 July 2008.

The executive Directors also receive a company car allowance, fuel allowance, private medical insurance, life insurance and permanent health insurance cover. Mr Martin also receives paid train travel to London and accommodation whilst working in London.

Annual bonusesBonus scheme arrangements are in place for executive Directors and senior management. Annual bonuses are awarded to the executive Directors and senior management based on achievement of a number of challenging objectives, including improvements in operating performance, earnings per share (EPS), improvements in working capital management, generation of savings from cost control and the disposal of non-core businesses. The maximum bonus payable is 100% of base salary. The Chairman does not participate in the annual bonus scheme.

Long term incentives The Company’s policy is to grant long term incentives to Directors and senior management that promote the success of the Company. The long term incentive plans in place are structured such that participants are only rewarded for growth in the underlying value of the businesses, thus aligning interests with those of shareholders.

During 2009 the Group operated the following long term incentive schemes:

2007 Incentive Share Scheme 2009 Incentive Share Scheme Divisional long term incentive plans FKI cash long term incentive plan

2007and2009IncentiveShareSchemesA revised long term incentive plan (the “2009 Incentive Share Scheme”) was approved by shareholders at a General Meeting held on 14 May 2009. The 2009 Incentive Share Scheme replaces the 2007 Incentive Share Scheme in order to provide flexibility as to how the Company delivers value to the holders of Incentive Shares, whilst continuing to align the interests of management with those of shareholders by only rewarding participants if shareholder value is created.

The 2007 Incentive Shares were repurchased from holders at their nominal value of £1 per share and each holder was issued the same number of 2009 Incentive Shares at the nominal value of £1 per share. The executive Directors and five senior employees are the only participants in the scheme. Amendments were made to the Company’s Articles to implement the new scheme. However rights attaching to the 2009 Incentive Shares under the revised Articles are identical to those attaching to the existing 2007 Incentive Share Scheme, with the exception of the changes described on the following page.

Remuneration report


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Participants of the 2009 Incentive Share Scheme are entitled to either a cash dividend or a number of Ordinary Shares, equal in value to 10% of the increase in shareholder value from 18 July 2007 to 31 May 2012, or earlier upon a takeover of the Company (“trigger date”). The increase in shareholder value is calculated as the difference between the market capitalisation on the trigger date (determined by reference to the average market price of an Ordinary Share over 40 business days prior to the trigger date, or the offer price as appropriate) and the net invested capital in the Company. The net invested capital is the issued share capital at 18 July 2007, plus any amounts paid up for the issue of new Ordinary Shares, less all dividend payments or other distributions made by the Company in respect of its Ordinary Shares, as adjusted in line with the movement in the RPI (plus 2% per annum).

The amended Articles provide that the entitlement may be settled by payment of a dividend as an alternative to conversion to Ordinary Shares. The amendments to the Articles further provide that holders of the 2009 Incentive Shares will no longer have the ability to request early conversion of some of their 2009 Incentive Shares in 2010 and/or 2011.

As at 31 December 2009 the fair value attributable to the 2009 Incentive Shares (including those held by the Employee Benefit Trust) was calculated as £21.0 million of which £18.3 million was attributable to the executive Directors. Details of the Directors’ beneficial interest in the 2009 Incentive Shares are shown in the table of Directors’ shareholdings later in this report.

The Melrose Employee Benefit Trust currently holds 500 of the 2009 Incentive Shares and in due course may transfer these shares, or grant options over them, to executive Directors and/or senior employees. In May and August 2009 a total of 2,500 of the 2009 Incentive Shares were transferred to senior employees.

DivisionallongtermincentiveplansDivisional long term incentive plans have been implemented for certain divisional senior managers. It is the intention of the Board that participants will receive a cash payment upon the sale of a division or based upon financial performance as measured by growth in operating profit from the date of the FKI acquisition, 1 July 2008, to December 2014.

FKIcashlongtermincentiveplanThere is a cash long term incentive plan for FKI senior management, which operates over rolling three year performance periods, ending on 31 March 2010 and 31 March 2011. This arrangement is entirely discretionary and is based on performance targets for the relevant business unit for each plan year.

Pension contributionsNo Director is a member of any Group pension arrangement. The executive Directors may elect to receive a Company contribution to their individual pension arrangement, or a supplement to base salary in lieu of a pension arrangement. Company contributions are calculated on base salary only.

Service contracts Consistent with the best practice guidance provided by the Combined Code, the Company’s policy is for Directors’ service contracts to be terminable on a maximum of one year’s notice. Directors’ service contracts do not provide for predetermined compensation in the event of termination. Any payments made would be subject to normal contractual principles, including mitigation as appropriate. The length of service for any one executive Director is not defined and is subject to the requirements under the rotation rules of the Companies Act 2006.

The non-executive Directors do not have service contracts, but have letters of appointment for an initial period of three years which may be renewed by mutual agreement, for a maximum of two further three year terms. The terms of appointment do not contain any contractual provisions regarding a notice period or the right to receive compensation in the event of early termination.

Details of the Directors’ contracts and letters of appointment are as set out below:

Executive Directors Date of contract Notice period

Christopher Miller 15 October 2003 12 monthsDavid Roper 15 October 2003 12 monthsSimon Peckham 15 October 2003 12 monthsGeoffrey Martin 5 December 2005 12 months

End of appointment Non-executive Directors Letter of appointment period

Miles Templeman 11 November 2009 27 October 2012Perry Crosthwaite 18 June 2008 25 July 2011John Grant 27 August 2009 31 July 2012

Directors’ shareholdingsOrdinary SharesThe Directors’ beneficial interests, including interests of connected persons (within the meaning of section 252 of the Companies Act 2006), in the Ordinary Shares of the Company as at 31 December 2009 are shown below. None of the Directors had any non-beneficial interest at any time in the financial year. None of the Directors who held office at the end of the financial year had any beneficial interest in the shares of other Group companies.

Number of Ordinary Shares of 0.2p of Melrose PLC

Purchased 1 January during 31 December Director 2009 the year 2009

Christopher Miller(1) 5,702,464 – 5,702,464David Roper 2,462,292 – 2,462,292Simon Peckham 1,948,067 – 1,948,067Geoffrey Martin 711,580 – 711,580Miles Templeman 214,279 139,843 354,122Perry Crosthwaite 131,250 – 131,250John Grant 153,806 – 153,806

Total 11,323,738 139,843 11,463,581(1) The interest of Mr Christopher Miller includes 2,750,000 Ordinary Shares of 0.2p

(31 December 2008: 2,750,000) held by Harris & Sheldon Investments Limited, a company which is connected with Mr Christopher Miller within the meaning of section 252 of the Companies Act 2006.


Remuneration reportcontinued

2007 and 2009 Incentive SharesThe Directors also had beneficial interests in the Company’s 2007 and 2009 Incentive Shares (nominal value £1) at 31 December 2009 as follows:

Number of Melrose PLC Number of Melrose PLC 2007 Incentive Shares 2009 Incentive Shares

1 January Repurchased 31 December 1 January Issued 14 May 31 DecemberDirector 2009 14 May 2009 2009 2009 2009 2009

Christopher Miller 12,000 (12,000) Nil Nil 12,000 12,000David Roper 12,000 (12,000) Nil Nil 12,000 12,000Simon Peckham 12,000 (12,000) Nil Nil 12,000 12,000Geoffrey Martin 7,500 (7,500) Nil Nil 7,500 7,500Miles Templeman Nil Nil Nil Nil Nil NilPerry Crosthwaite Nil Nil Nil Nil Nil NilJohn Grant Nil Nil Nil Nil Nil Nil

There were no options over 2009 Incentive Shares outstanding as at 31 December 2009.

Total shareholder return The Ordinary Share capital of the Company was admitted to the Official List and to trading on the London Stock Exchange on 9 December 2005. The performance of the Company’s Ordinary Shares compared with the FTSE All Share Index and the FTSE Industrial Engineering Index for the period since the Company became fully listed on the London Stock Exchange is shown in the graph below.

Dec05

Dec09

Dec08

Jun09

Dec07

Dec06

Jun06

Jun08

Jun07

Melrose return

180

160

140

120

100

80

60

40

FTSE All Share Index FTSE Industrial Engineering Index

The total shareholder return graph shows the value as at December 2009 of £100 invested in the Company in December 2005, compared with £100 invested in the FTSE All Share Index and the FTSE Industrial Engineering Index. These are considered the most relevant indices given the Company is part of the FTSE All Share Index and the underlying businesses of the Company operate in the industrial engineering sector.

The source data for the above chart assumes that the £220 million of cash returned to shareholders in August 2007, following the McKechnie Aerospace and PSM Fasteners disposals, was reinvested to purchase shares in the Company. This results in an adjustment factor on the price and this factor is used in ongoing calculations of shareholder return for the Company, as ordinarily a return of capital would reduce the share price and an analysis of returns going forward would not reflect value already returned to shareholders. The benefit of any cash distribution is therefore, in Melrose’s case, reflected within the shareholder return performance of the Company.


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Audited information: Directors’ remuneration

Emoluments during 2009

In lieu 2009 2009 2008 Salaries/ Taxable of pension Total Pension Total TotalDirectors fees Bonus benefits contributions(1) emoluments contributions(1) remuneration remuneration

Christopher Miller(2) 375,000 – 19,335 56,250 450,585 – 450,585 413,155David Roper 375,000 262,500 18,622 56,250 712,372 – 712,372 636,915Simon Peckham 375,000 262,500 18,177 12,750 668,427 43,500 711,927 637,227Geoffrey Martin 300,000 210,000 30,701 7,200 547,901 37,800 585,701 529,852Miles Templeman(3) 50,000 – – – 50,000 – 50,000 42,500Perry Crosthwaite(4) 50,000 – – – 50,000 – 50,000 42,500John Grant 45,000 – – – 45,000 – 45,000 37,500

Total 1,570,000 735,000 86,835 132,450 2,524,285 81,300 2,605,585 2,339,649

(1) Of the £213,750 attributable to pension contributions, £132,450 was paid as a supplement to base salary in lieu of pension arrangements. The balance of £81,300 is paid into the individual Directors’ nominated private pension schemes.

(2) Mr Miller is a non-executive Director of TMO Renewables Limited. His fees for the year were £45,600. This amount is retained by Mr Miller and therefore excluded from the table above.(3) Includes £5,000 per annum in recognition of Chairmanship of the Audit and Nomination Committees.(4) Includes £5,000 per annum in recognition of Chairmanship of the Remuneration Committee.

This report was approved by the Board on 10 March 2010 and signed on its behalf by

Perry CrosthwaiteChairman of the Remuneration Committee10 March 2010


The Directors are responsible for preparing the Annual Report, Directors’ Remuneration report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the IAS Regulation to prepare the Group financial statements under International Financial Reporting Standards (IFRSs) as adopted by the European Union. The Group financial statements are also required by law to be properly prepared in accordance with the Companies Act 2006 and Article 4 of the IAS Regulation.

International Accounting Standard 1 requires that that IFRS financial statements present fairly for each financial year the company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. However, Directors are also required to:

properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and

provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

The Directors have elected to prepare the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The Company financial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the Directors are required to:

select suitable accounting policies and then apply them consistently;

make judgements and accounting estimates that are reasonable and prudent; and

state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Company financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ responsibility statement The Directors confirm to the best of their knowledge:

the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

the Chairman’s statement, Chief Executive’s review and Finance Director’s review, which are incorporated into the Directors’ report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Geoffrey Martin Simon PeckhamGroup Finance Director Chief Operating Officer10 March 2010

Statement of Directors’ responsibilities


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Financial contents

Consolidated statements

Independent auditors’ report – consolidated statements 46Consolidated Income Statement 47Consolidated Statement of Comprehensive Income 48Consolidated Statement of Cash Flows 49Consolidated Balance Sheet 50Consolidated Statement of Changes in Equity 51

Notes to the accounts

Note1 Corporate information 522 Summary of significant accounting policies 533 Critical accounting judgements 584 Revenue 595 Segment information 596 Exceptional costs and income 627 Revenues and expenses 638 Tax 659 Discontinued operations 6610 Dividends 6711 Earnings per share 6812 Goodwill and other intangible assets 6913 Property, plant and equipment 7114 Interests in joint ventures 7215 Inventories 7216 Trade and other receivables 7317 Cash and cash equivalents 7418 Trade and other payables 7419 Interest-bearing loans and borrowings 7520 Provisions 7621 Deferred tax 7722 Share-based payments 7823 Retirement benefit obligations 7824 Financial instruments and risk management 8225 Issued capital and reserves 8626 Cash flow statement 8727 Commitments and contingencies 8828 Related parties 8929 Post balance sheet events 8930 Contingent liabilities 89

Company statements

Independent auditors’ report – Company statements 90 Company Balance Sheet for Melrose PLC 91

Notes to the Company Balance Sheet

Note 1 Significant accounting policies 92 2 Profit for the year 93 3 Investment in subsidiaries 94 4 Tangible fixed assets 95 5 Derivative financial instruments 96 6 Debtors 96 7 Creditors 96 8 Bank loans 96 9 Provisions for liabilities and charges 97 10 Issued share capital 97 11 Reserves 98 12 Hedging reserve 98 13 Reconciliation of movements in shareholders’ funds 98 14 Related party transactions 98


Independent auditors’ report – consolidated statements

Independent auditors’ report to the members of Melrose PLC on the consolidated financial statements We have audited the consolidated financial statements of Melrose PLC for the year ended 31 December 2009 which comprise the consolidated Income Statement, the consolidated Balance Sheet, the consolidated Statement of Cash Flows, the consolidated Statement of Comprehensive Income, consolidated Statement of Changes in Equity and the related notes 1 to 30. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorsAs explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

Opinion on financial statementsIn our opinion the Group financial statements:

give a true and fair view of the state of the Group’s affairs as at 31 December 2009 and of its profit for the year then ended;

have been properly prepared in accordance with IFRSs as adopted by the European Union; and

have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the Group financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following.

Under the Companies Act 2006 we are required to report to you if, in our opinion:

certain disclosures of Directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

Under the Listing Rules we are required to review:

the Directors’ statement contained within the Directors’ report in relation to going concern; and

the part of the Corporate Governance statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review.

Other mattersWe have reported separately on the Company financial statements of Melrose PLC for the year ended and on the information in the Directors’ Remuneration report that is described as having been audited.

Nicola Mitchell (Senior Statutory Auditor)for and on behalf of Deloitte LLPChartered Accountants and Statutory Auditors London, UK10 March 2010


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Consolidated Income Statement

Restated(2) Year ended Year ended 31 December 31 December 2009 2008 Notes £m £m

Continuing operationsRevenue 4, 5 1,298.5 895.3Cost of sales (970.3) (677.9)

Gross profit 328.2 217.4

Headline(1) operating expenses (178.9) (120.7)Share of results of joint ventures 14 0.4 (0.1)Intangible asset amortisation (26.7) (13.6)Exceptional costs 6 (23.9) (12.9)Exceptional income 6 14.0 –

Total net operating expenses 7 (215.1) (147.3)

Operating profit 113.1 70.1

Headline(1) operating profit 5 149.7 96.6

Headline(1) finance costs 7 (36.2) (28.2)Exceptional finance costs 6 – (23.1)

Total finance costs (36.2) (51.3)Finance income 4, 7 5.1 4.7

Profit before tax 82.0 23.5

Headline(1) profit before tax 118.6 73.1

Headline(1) tax (36.1) (21.8)Tax on exceptional items and intangible asset amortisation 8.8 11.7

Total tax 8 (27.3) (10.1)

Profit for the year from continuing operations 54.7 13.4

Headline(1) profit for the year from continuing operations 82.5 51.3

Discontinued operationsProfit/(loss) for the year from discontinued operations 9 24.6 (61.2)

Profit/(loss) for the year 79.3 (47.8)

Attributable to:Equity holders of the parent 79.5 (48.3)Minority interests (0.2) 0.5

79.3 (47.8)

Earnings per shareFrom continuing operations– Basic 11 11.0p 4.1p– Fully diluted 11 10.8p 4.1p

– Headline(1) basic 11 16.6p 16.1p– Headline(1) fully diluted 11 16.3p 16.1p

From continuing and discontinued operations– Basic 11 16.0p (15.3p)– Fully diluted 11 15.6p (15.3p)

(1) Before exceptional costs, exceptional income and intangible asset amortisation. (2) Restated to include the results of Logistex Europe within discontinued operations.



Profit/(loss) for the year 79.3 (47.8)

Currency translation on net investments 25 (32.8) 123.0 Currency translation adjustments on minority interests (0.2) (1.5)Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations 9, 25 (11.4) (8.9)Gains/(losses) on cash flow hedges 25 5.9 (19.8)Transfer to Income Statement on cash flow hedges 25 11.8 1.1 Actuarial loss on net pension liabilities 23 (89.9) (8.2)Limit on pension plan surplus 23 14.1 (14.1)

Other comprehensive income before tax (102.5) 71.6

Tax relating to components of other comprehensive income 8 13.0 3.6

Other comprehensive income after tax (89.5) 75.2

Total comprehensive income for the year (10.2) 27.4

Attributable to:Equity holders of the parent (9.8) 28.4 Minority interests (0.4) (1.0)

(10.2) 27.4

(1) The Consolidated Statement of Comprehensive Income replaces the Consolidated Statement of Recognised Income and Expense. The year ended 31 December 2008 has been restated to include £0.7 million of expense previously shown directly in equity.

Consolidated Statement of Comprehensive Income


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Net cash from operating activities from continuing operations 26 176.8 79.8 Net cash (used in)/from operating activities from discontinued operations 26 (2.0) 38.8

Net cash from operating activities 174.8 118.6

Investing activitiesDisposal of businesses 9 49.2 (1.5)Net cash disposed 9 (0.6) – Purchase of property, plant and equipment (22.9) (30.3)Proceeds on disposal of property, plant and equipment 1.0 0.6 Purchase of computer software (0.9) (0.5)Dividends received from joint ventures 14 0.2 0.2 Dividends paid to minority interests (0.2) (0.5)Interest received 3.8 4.2 Acquisition of subsidiaries – (257.0)Cash acquired on acquisition of subsidiaries – 85.3

Net cash from/(used in) investing activities from continuing operations 29.6 (199.5)Net cash used in investing activities from discontinued operations 26 (1.3) (3.8)

Net cash from/(used in) investing activities 28.3 (203.3)

Financing activitiesNet proceeds on issue of shares – 279.5 Disposal of financial instruments – 17.1 Net movement on borrowings (185.8) (19.4)Costs of raising finance – (11.8)Exceptional finance costs paid – (17.9)Repayment of obligations under finance leases (0.1) (2.6)Dividends paid 10 (35.6) (19.4)FKI dividend paid – (17.7)Capital distribution – (7.4)

Net cash (used in)/from financing activities from continuing operations (221.5) 200.4 Net cash used in financing activities from discontinued operations 26 – (0.6)

Net cash (used in)/from financing activities (221.5) 199.8

Net (decrease)/increase in cash and cash equivalents (18.4) 115.1 Cash and cash equivalents at beginning of year 26 167.7 46.4 Effect of foreign exchange rate changes 26 (1.8) 6.2

Cash and cash equivalents at end of year 26 147.5 167.7

Cash classified as held for sale – (2.0)

Cash and cash equivalents in continuing Group at end of year 17 147.5 165.7

(1) Restated to include the results of Logistex Europe within discontinued operations.


Consolidated Balance Sheet

Restated(1) 31 December 31 December 1 January 2009 2008 2008 Notes £m £m £m

Non-current assetsGoodwill and other intangible assets 12 1,184.3 1,287.4 207.4Property, plant and equipment 13 252.3 291.9 60.7Interests in joint ventures 14 0.3 0.1 –Derivative financial assets 24 0.6 – 0.4Deferred tax assets 21 22.1 29.8 3.1

1,459.6 1,609.2 271.6Current assetsInventories 15 222.6 327.9 29.7Trade and other receivables 16 213.0 335.8 67.0Derivative financial assets 24 2.0 3.1 –Cash and cash equivalents 17 147.5 165.7 46.4Assets held for sale – 92.9 –

585.1 925.4 143.1

Total assets 5 2,044.7 2,534.6 414.7

Current liabilitiesTrade and other payables 18 319.5 443.7 77.9Interest-bearing loans and borrowings 19 1.3 0.7 8.1Derivative financial liabilities 24 2.8 25.3 –Current tax liabilities 49.3 33.6 7.8Provisions 20 44.6 62.4 3.5Liabilities held for sale(2) – 72.5 –

417.5 638.2 97.3

Net current assets 167.6 287.2 45.8

Non-current liabilitiesTrade and other payables 18 1.8 3.1 –Interest-bearing loans and borrowings 19 467.9 709.8 13.1Derivative financial liabilities 24 0.2 – –Deferred tax liabilities 21 125.3 136.2 8.1Retirement benefit obligations 23 169.1 143.3 25.2Provisions 20 99.6 96.5 3.5

863.9 1,088.9 49.9

Total liabilities 5 1,281.4 1,727.1 147.2

Net assets 763.3 807.5 267.5

EquityIssued share capital 25 1.1 1.1 58.3Share premium account 279.1 279.1 –Merger reserve 285.1 285.1 37.0Capital redemption reserve 220.1 220.1 154.6Hedging and translation reserves 25 71.6 100.4 2.2Retained earnings (95.4) (80.6) 14.2

Equity attributable to holders of the parent 761.6 805.2 266.3Minority interests 1.7 2.3 1.2

Total equity 763.3 807.5 267.5

(1) Restated to reflect the finalisation of the acquisition accounting of FKI plc. (2) Liabilities directly associated with assets classified as held for sale.

The financial statements were approved and authorised for issue by the Board of Directors on 10 March 2010 and were signed on its behalf by

Geoffrey Martin Simon PeckhamGroup Finance Director Chief Operating Officer


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Consolidated Statement of Changes in Equity

Hedging Equity Issued Share Capital and attributable share premium Merger redemption translation Retained to holders of Minority Total capital account reserve reserve reserves earnings the parent interests equity

Reserves £m £m £m £m £m £m £m £m £m

At 1 January 2008 58.3 – 37.0 154.6 2.2 14.2 266.3 1.2 267.5

(Loss)/profit for the year – – – – – (48.3) (48.3) 0.5 (47.8)Other comprehensive income – – – – 98.2 (21.5) 76.7 (1.5) 75.2

Total comprehensive income – – – – 98.2 (69.8) 28.4 (1.0) 27.4

Issue of “offer and placement” Ordinary Shares 0.5 279.1 – – – – 279.6 – 279.6 Acquisition of FKI 0.3 – 248.1 – – – 248.4 2.6 251.0 Preference C Shares redeemed (58.0) – – 65.5 – (7.4) 0.1 – 0.1 Dividend paid – – – – – (19.4) (19.4) (0.5) (19.9)Credit to equity for equity-settled share-based payments – – – – – 1.8 1.8 – 1.8

At 31 December 2008 1.1 279.1 285.1 220.1 100.4 (80.6) 805.2 2.3 807.5

Profit/(loss) for the year – – – – – 79.5 79.5 (0.2) 79.3 Other comprehensive income – – – – (28.8) (60.5) (89.3) (0.2) (89.5)

Total comprehensive income – – – – (28.8) 19.0 (9.8) (0.4) (10.2)

Dividend paid – – – – – (35.6) (35.6) (0.2) (35.8)Credit to equity for equity-settled share-based payments – – – – – 1.8 1.8 – 1.8

At 31 December 2009 1.1 279.1 285.1 220.1 71.6 (95.4) 761.6 1.7 763.3


1 Corporate informationThe consolidated financial statements of Melrose PLC (“the Group”) for the year ended 31 December 2009 were authorised in accordance with a resolution of the Directors of Melrose PLC on 10 March 2010.

Melrose PLC (“the Company”) is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is given on page 103. The nature of the Group’s operations and its principal activities are set out in note 5.

These financial statements are presented in pounds Sterling which is the currency of the primary economic environment in which the Company is based. The Income Statement for the year ended 31 December 2008 has been restated to include the results of Logistex Europe within discontinued operations and the Balance Sheet as at 31 December 2008 has been restated to reflect the finalisation of the acquisition accounting of FKI plc. Foreign operations are included in accordance with the policies set out in note 2.

1.1 New Standards and Interpretations affecting amounts, presentation or disclosure reported in the current periodDuring the current period, the Group adopted the following new and revised Standards and Interpretations which affected the amounts reported in these financial statements. Details of other Standards and Interpretations adopted in these financial statements that had no significant impact on the amounts reported are set out in section 1.2.

Amendments to IFRS 7: Financial instruments: disclosuresThe amendments to IFRS 7 expand the disclosures required in respect of fair value measurements and liquidity risk. The Group has elected not to provide comparative information for those expanded disclosures in the current year in accordance with the transitional reliefs offered in these amendments.

Revised IFRS 3 (2008): Business combinations (early adopted)The Company has early adopted IFRS 3 (2008). During the year, a £7.4 million deferred tax asset on retirement benefit obligations has been recognised in the Statement of Comprehensive Income which would previously have resulted in an adjustment to goodwill.

Revised IAS 1 (2007): Presentation of financial statementsIAS 1 (2007) introduced terminology changes and a number of changes to the format and content of the financial statements. In addition, the revised Standard has required the presentation of a third Balance Sheet at 1 January 2008 because the Group has restated comparative 31 December 2008 figures to reflect the finalisation of the acquisition accounting of FKI plc as shown in note 12. No restatement was required to the Balance Sheet as at 1 January 2008.

IFRS 8: Operating segmentsIFRS 8 is a disclosure Standard that requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group’s Board. This has not resulted in a change to the Group’s reportable segments although certain geographical information is no longer required to be presented.

1.2 New Standards and Interpretations adopted with no significant effect on financial statementsThe following new and revised Standards and Interpretations have also been adopted in these financial statements. Their adoption has not had any significant impact on the amounts reported in these financial statements, but may impact the accounting for future transactions and arrangements.

Amendments to IFRS 2: Share based payments, vesting conditions and cancellationsAmendments to IAS 20: Accounting for government grants and disclosure of government assistanceAmendments to IAS 32: Financial instruments (presentation) and IAS 1: Presentation of financial statements; puttable financial instruments and obligations arising on liquidationAmendments to IAS 38: Intangible assetsAmendments to IAS 39: Financial instruments: recognition and measurement – eligible hedged itemsAmendments to IAS 39 and IFRS 7: Recognition, measurement and disclosure of financial assetsAmendments to IAS 40: Investment propertyRevised IAS 23 (2007): Borrowing costsRevised IAS 27: Consolidated and separate financial statements (early adopted)Amendments to IFRIC 9: Reassessment of embedded derivatives and IAS 39: Financial instruments; recognition and measurement: embedded derivativesIFRIC 13: Customer loyalty programmesIFRIC 15: Agreements for construction of real estateIFRIC 16: Hedges of a net investment in a foreign operationIFRIC 18: Transfer of assets from customers Improvements to IFRS’s (2008 and 2009)

1.3 New Standards and Interpretations in issue but not yet effectiveAt the date of authorisation of these financial statements, the following Standards and Interpretations are in issue but not yet effective:

Amendments to IFRS 1 and IAS 27: Cost of an investment in a subsidiary, jointly controlled entity or associateRevised IAS 17: LeasesRevised IAS 28: Investments in associatesIFRIC 17: Distribution of non-cash assets to owners

The Directors do not anticipate that the adoption of these Standards and Interpretations will have a material impact on the Group’s financial statements in the period of initial application.

Notes to the accounts


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2 Summary of significant accounting policiesBasis of accountingThe consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). The financial statements have also been prepared in accordance with IFRSs adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation.

The consolidated financial statements have been prepared on a historical cost basis, except for the revaluation of certain financial instruments which are recognised at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for these assets. The principal accounting policies adopted are consistent with the prior year, except as noted in note 1, and are set out below.

The comparative Income Statement for the year ended 31 December 2008 has been restated to include the results of Logistex Europe within discontinued operations and the Balance Sheet as at 31 December 2008 has been restated to reflect the finalisation of the acquisition accounting of FKI plc.

Basis of consolidationThe Group financial statements include the results of the parent undertaking and all of its subsidiary undertakings. The results of businesses acquired during the period are included from the effective date of acquisition and for those sold during the period to the effective date of disposal.

Minority interests in subsidiaries are identified separately from the Group’s equity therein. The interest of minority shareholders is initially measured at the minority interests proportion of the share of the fair value of the acquiree’s identifiable net assets. Subsequent to acquisition, the carrying amount of minority interests is the amount of those interests at initial recognition plus the minority interests’ share of subsequent changes in equity. Income and expense is attributed to minority interests even if this results in the minority interests having a deficit balance.

Where Group accounting policies are not adopted in the financial statements of subsidiary undertakings, appropriate adjustments are made in the Group financial statements.

All inter-group balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.

Going concernThe Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the Directors’ statement of going concern on page 34 of the Directors’ report.

Business combinations and goodwillThe acquisition of subsidiaries is accounted for using the purchase method. The cost of acquisition is measured at the fair value of assets given, the liabilities incurred or assumed at the date of exchange of control and equity instruments issued by the Group in exchange for control of the acquiree. Due to the early adoption of IFRS 3 (revised 2008): “Business combinations” from 1 January 2009, costs directly attributable to business combinations are recognised as an expense in the Income Statement as incurred. The acquired identifiable assets and liabilities are measured at their fair value at the date of acquisition except for non-current assets and directly attributable liabilities that are classified as held for sale in accordance with IFRS 5: “Non-current assets held for sale and discontinued operations”, which are recognised and measured at fair value less costs to sell. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts where appropriate. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised at that date.

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date and is subject to a maximum period of one year.

Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units acquired. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in the Income Statement and is not subsequently reversed. When there is a disposal of a cash-generating unit, goodwill relating to the operation disposed of is taken into account in determining the gain or loss on disposal of that operation. The amount of goodwill allocated to a partial disposal is measured on the basis of the relative values of the operation disposed of and the operation retained.

Joint venturesA joint venture is an entity which is not a subsidiary undertaking but where the interest of the Group is that of a partner in a business over which the Group exercises joint control. The results, assets and liabilities of joint ventures are accounted for using the equity method of accounting.


Notes to the accountscontinued

2 Summary of significant accounting policies continuedRevenueRevenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, customs duties and sales taxes.

Where percentage of completion accounting is applied and where the outcome of a long-term contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the Balance Sheet date. This is normally measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer.

Where the outcome of a long-term contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recoverable. Contract costs are recognised as expenses in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

Interest income is accrued on a time basis, by reference to the principal outstanding and the effective interest applicable.

Exceptional costs/incomeExceptional costs/income are those costs/income of a significant and non-recurring nature or those associated with significant restructuring programmes.

Operating profitOperating profit is stated after exceptional operating costs and income, intangible asset amortisation and the Group’s share of results of joint ventures, but before finance income and finance costs.

Borrowing costsBorrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the Income Statement in the period in which they are incurred.

Issue costs of loansThe finance cost recognised in the Income Statement in respect of capital instruments is allocated to periods over the terms of the instrument using the effective interest rate method.

Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and any impairment in value.

The initial cost of an asset comprises its purchase price or construction cost, and any costs directly attributable to bring the asset into operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. The capitalised value of a finance lease is also included within property, plant and equipment.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:

Freehold land nil

Freehold buildings and long over expected economic life leasehold property not exceeding 50 years

Short leasehold property over the term of the lease

Plant and equipment 3–12 years

The estimated useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists an impairment review is performed and, where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount of property, plant and equipment is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs and allocated proportionately.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds or costs and the carrying amount of the item) is included in the Income Statement in the year that the item is derecognised.

Intangible assetsIntangible assets are stated at cost less accumulated amortisation and accumulated impairment losses.

On acquisition of businesses, separately identifiable intangible assets are determined in relation to the specific circumstances of the business acquired and are valued on an appropriate basis.

Access to the use of patented technology and trade names are valued using a “relief from royalty” method which determines the net present value of future additional cash flows arising from the use of the intangible asset.

Customer relationships are valued on the basis of the net present value of the future additional cash flows arising from customer relationships with appropriate allowance for attrition of customers.


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2 Summary of significant accounting policies continuedThe estimated useful lives of intangible assets are:

Patented technology 5 years or less

Customer relationships 10 years or less

Trade names 20 years or less

Computer software is initially recorded at cost. Where these assets have been acquired through a business combination, this will be the fair value allocated in the acquisition accounting. Where these have been acquired other than through a business combination, the initial cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Computer software assets are amortised over their estimated useful lives (up to five years) on a straight-line basis.

Intangible assets are tested for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment losses are measured on a similar basis to property, plant and equipment. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.

Research and development costsResearch costs are expensed as incurred.

Costs relating to clearly defined and identifiable development projects are capitalised when there is a technical degree of exploitation, adequacy of resources and a potential market or development possibility in the undertaking that are recognisable; and where it is the intention to produce, market or execute the project. A correlation also needs to exist between the costs incurred and future benefits and those costs need to be measured reliably. Capitalised expenses are expensed on a straight-line basis over their useful lives. Costs not meeting such criteria are expensed as incurred.

InventoriesInventories are valued at the lower of cost and net realisable value. Cost includes all direct expenditure and appropriate production overhead expenditure incurred in bringing goods to their current state under normal operating conditions. Net realisable value is based on estimated selling price less costs expected to be incurred to completion and disposal. Provisions have been made for obsolescence or other expected losses where necessary.

Trade and other receivablesTrade receivables are measured and carried at amortised cost using the effective interest method, less any impairment. An allowance is recorded in the Income Statement for the difference between the carrying amount and the estimated recoverable amount.

Cash and cash equivalentsCash and cash equivalents in the Balance Sheet comprise cash in hand and current balances with banks and similar institutions and short-term deposits which are readily convertible to cash and are subject to insignificant risks of changes in value.

For the purpose of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

Interest-bearing loans and borrowingsAll loans and borrowings are initially recognised at fair value of the consideration received net of issue costs associated with the borrowings.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

Gains and losses are recognised in the Income Statement when the liabilities are derecognised or impaired, as well as through the amortisation process.

LeasesFinance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the Balance Sheet as a finance lease obligation. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.

Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.

Other financial liabilities Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant periods. The effective interest rate is the rate that discounts estimated future cash payments throughout the expected life of the financial liability, or, where appropriate, a shorter period.

Derivative financial instruments and hedgingThe Group uses derivative financial instruments to manage its exposure to interest rate, foreign exchange rate and commodity risks, arising from operating and financing activities. The Group does not hold or issue derivative financial instruments for trading purposes. Details of derivative financial instruments are disclosed in note 24 of the financial statements. Movements on the hedging reserve in equity are detailed in note 25.

Derivative financial instruments are recognised and stated at fair value. Their fair value is recalculated at each reporting date. The accounting treatment for the resulting gain or loss will depend on whether the derivative meets the criteria to qualify for hedge accounting.



2 Summary of significant accounting policies continuedWhere derivatives do not meet the criteria to qualify for hedge accounting, any gains or losses on the revaluation to fair value at the period end are recognised immediately in the Income Statement. Where derivatives do meet the criteria to qualify for hedge accounting, recognition of any resulting gain or loss on revaluation depends on the nature of the hedge relationship and the item being hedged.

Derivative financial instruments with maturity dates of less than one year from the period end date are classified as current in the Balance Sheet.

Hedge accountingIn order for an item to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and the hedging instrument and to show that the hedge will be highly effective on an ongoing basis. This effectiveness testing is performed at each period end to ensure that the hedge remains highly effective.

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedge instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting.

The Group designates certain hedging instruments, as either fair value hedges, cash flow hedges, or hedges of net investments in foreign operations.

Fair value hedgeDerivative financial instruments are classified as fair value hedges when they hedge the Group’s exposure to changes in the fair value of a recognised asset or liability. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the Income Statement immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.

Cash flow hedgeDerivative financial instruments are classified as cash flow hedges when they hedge the Group’s exposure to the variability in cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted cash flow.

The effective portion of any gain or loss from revaluing the derivative financial instrument is recognised in the Statement of Comprehensive Income and accumulated in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement.

Amounts previously recognised in the Statement of Comprehensive Income and accumulated in equity are recycled to the Income Statement in the periods when the hedged item is recognised in the Income Statement or the hedged relationship is discontinued. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability.

Hedges of net investments in foreign operationsDerivative financial instruments are classified as net investment hedges when they hedge the Group’s net investment in foreign operations. The effective element of any foreign exchange gain or loss from revaluing the derivative at a reporting period end is recognised in the Statement of Comprehensive Income. Any ineffective element is recognised immediately in the Income Statement.

Gains and losses accumulated in equity are recognised immediately in the Income Statement when the foreign operation is disposed of or the hedged relationship is discontinued.

ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a rate that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

Environmental liabilitiesLiabilities for environmental costs are recognised when environmental assessments or clean-ups are probable and the associated costs can be reasonably estimated. Generally, the timing of these provisions coincides with the commitment to a formal plan of action. The amount recognised is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognised is the present value of the estimated future expenditure.

Employee benefitsWages, salaries, bonuses, social security contributions, paid annual leave and sick leave are accrued in the year in which the associated services are rendered by employees of the Group. The accounting policy for pensions and other retirement benefits is described below.

The Group also operates long term incentive plans (LTIPs) for certain employees. The expected settlement costs of these plans are expensed on a straight-line basis over the life of the plans.

Pensions and other retirement benefitsThe Group operates defined benefit pension plans and defined contribution plans, some of which require contributions to be made to administered funds separate from the Group. In some jurisdictions, funds are not administered separately from the Group but appropriate liabilities are recognised in the Balance Sheet.

For the defined benefit pension and retirement benefit plans, plan assets are measured at fair value and plan liabilities are measured on an actuarial basis, using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities. Any assets resulting from this calculation are limited to past service cost plus the present value of available refunds and reductions in future contributions to the plan.

The service cost of providing pension and other retirement benefits to employees for the period is charged to the Income Statement.


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2 Summary of significant accounting policies continuedA charge representing the unwinding of the discount on the plan liabilities during the period is included within finance costs.

A credit representing the expected return on the plan assets during the period is included within finance costs. This credit is based on the market value of the plan assets, and expected rates of return, at the beginning of the year.

Actuarial gains and losses may result from: differences between the expected return and the actual return on plan assets; differences between the actuarial assumptions underlying the plan liabilities and actual experience during the period; or changes in the actuarial assumptions used in the valuation of the plan liabilities. Actuarial gains and losses, and taxation thereon, are recognised in the Statement of Comprehensive Income.

For defined contribution plans, contributions payable are charged to the Income Statement as they fall due as an operating expense.

Foreign currenciesThe individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each Balance Sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the Balance Sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the Income Statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the Income Statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the Balance Sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in the Statement of Comprehensive Income and accumulated in equity (attributed to minority interests as appropriate). Such translation differences are recognised as income or as expenses in the period in which the

related operation is disposed of. Any exchange differences that have previously been attributed to minority interests are derecognised but they are not reclassified to the Income Statement.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the rate prevailing at the Balance Sheet date.

TaxationThe tax expense is based on the taxable profits for the period and represents the sum of the tax paid or currently payable and deferred tax.

Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date.

Deferred tax is provided, using the liability method, on all temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences except:

where the deferred tax liability arises on goodwill that is not tax deductible or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and where the timing of the reversal of the temporary differences associated with investments in subsidiaries and interests in joint ventures can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and carry-forward of unused tax assets and unused tax losses can be utilised except:

where the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.



2 Summary of significant accounting policies continuedDeferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the relevant Balance Sheet date.

Tax relating to items recognised directly in equity is recognised in equity and not in the Income Statement.

Revenues, expenses and assets are recognised net of the amount of sales tax except:

where the sales tax incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and where receivables and payables are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Balance Sheet.

Share-based paymentsThe Group has applied the requirements of IFRS 2: “Share-based payments”. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value excluding the effect of non-market based vesting conditions at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.

Fair value is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

Non-current assets and businesses held for saleNon-current assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and businesses are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as having been met only when the sale is highly probable and the asset or business is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

3 Critical accounting judgementsIn applying the Group’s accounting policies as set out in note 2, management has made critical accounting judgements in the quantification of provisions, the impairment of goodwill and intangible assets and the valuation of retirement benefit obligations and financial instruments. Due to the inherent uncertainty involved in making assumptions and estimates, actual outcomes will differ from those assumptions and estimates. An analysis of the key sources of estimation uncertainty at the Balance Sheet date that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year is provided below.

ProvisionsThe quantification of certain liabilities within provisions (environmental remediation obligations and future legal costs in relation to certain claims) have been estimated using the best information available. However, such liabilities depend on the actions of third parties and on the specific circumstances pertaining to each obligation, neither of which is controlled by the Group.

Impairment of non-current assetsGoodwill and intangible assets are tested for impairment whenever events or circumstances indicate that their carrying amounts might be impaired, and in any event, at least annually. Such events and circumstances include the effects of restructuring initiated by management.

To determine whether goodwill and intangible assets are impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill and other intangible assets at the Balance Sheet date was £1,184.3 million (31 December 2008: £1,287.4 million, 1 January 2008: £207.4 million). At 31 December 2009, the Group recognised no impairment loss in respect of these assets.

Retirement benefit obligationsIn assessing the Group’s obligations relating to retirement benefits, management makes key assumptions relating to current and future mortality, discount rates and inflation.

Financial instrumentsDerivative financial instruments are recognised as assets and liabilities in the Group’s Balance Sheet measured at their fair value at the Balance Sheet date. The fair value of derivatives continually changes in response to changes in prevailing market conditions. Where permissible under IAS 39, the Group uses hedge accounting to mitigate the impact of changes in the fair value of derivatives on the Income Statement but the Group’s results may be affected by changes in the fair values of derivatives where hedge accounting cannot be applied or due to hedge ineffectiveness.


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4 RevenueAn analysis of the Group’s revenue, as defined by IAS 18, is as follows:

Restated(1)

Year ended Year ended 31 December 31 December 2009 2008 Notes £m £m

Continuing operationsRevenue from the sale of goods 1,265.6 883.2Revenue recognised on long-term contracts 32.9 12.1

Revenue 5 1,298.5 895.3

Finance income 7 5.1 4.7

Total revenue from continuing operations as defined by IAS 18 1,303.6 900.0

Discontinued operationsRevenue from the sale of goods 83.8 139.5Revenue recognised on long-term contracts 101.8 54.0

Revenue 5, 9 185.6 193.5

Finance income – 0.2

Total revenue from discontinued operations as defined by IAS 18 185.6 193.7

Total revenue as defined by IAS 18 1,489.2 1,093.7


5 Segment informationThe Group has adopted IFRS 8: “Operating segments” with effect from 1 January 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group’s Board in order to allocate resources to the segments and assess their performance. Therefore, the Group’s reportable segments under IFRS 8 are as follows:

Energy Lifting Dynacast Other Industrial

The Energy segment incorporates the Turbogenerators, Marelli, Transformers and Switchgear business units, all specialist suppliers of energy industrial products to the global market. The Lifting segment consists primarily of the businesses of Bridon and Crosby, serving oil and gas production, mining, petrochemical, alternative energy and general construction markets. The Dynacast segment only includes the Dynacast business, which is a supplier of die-cast parts and components to a range of industries. Other Industrial incorporates all other operating businesses. Details of the significant companies included within the Other Industrial segment are set out in the Business review on pages 16 to 18.

There are two central cost centres which are also separately reported to the Board:

Central – corporate Central – LTIPs(1)

(1) Long term incentive plans.

The Central corporate cost centre contains the Melrose Group head office costs whilst the Central LTIP cost centre contains the costs associated with the 2009 Melrose Incentive Scheme and the divisional management LTIP schemes that are in operation across the Group.

As a result of the disposal of Logistex Europe to the Beumer Group on 28 August 2009, the results of this business have been reclassified to be shown within discontinued operations.

Transfer prices between business units are set on an arm’s length basis in a manner similar to transactions with third parties.

The Group’s geographical segments are determined by the location of the Group’s assets and operations. Inter-segment sales are not material and have not been included in the analysis on page 60.



5 Segment information continuedThe following tables present revenue and profit information and certain asset and liability information regarding the Group’s operating segments for the year ended 31 December 2009 and the comparative period. Note 6 gives details of exceptional costs and income.

Segment revenues and results

Segment revenue from external customers

Restated(1)

Year ended Year ended 31 December 31 December 2009 2008 Note £m £m

Continuing operationsEnergy 418.3 229.4Lifting 419.0 232.3Dynacast 208.7 246.3Other Industrial 252.5 187.3

Total continuing operations 1,298.5 895.3

Discontinued operations 9 185.6 193.5

Total revenue 1,484.1 1,088.8


Segment result

Restated(1)

Year ended Year ended 31 December 31 December 2009 2008 Notes £m £m

Continuing operationsEnergy 61.0 30.9 Lifting 62.5 35.7 Dynacast 21.3 33.4 Other Industrial 20.6 13.4 Central – corporate (8.9) (10.6)Central – LTIPs(2) (6.8) (6.2)

Total headline(3) operating profit 149.7 96.6

Intangible asset amortisation (26.7) (13.6)Exceptional costs 6 (23.9) (12.9)Exceptional income 6 14.0 –

Operating profit 113.1 70.1

Headline(3) finance costs 7 (36.2) (28.2)Exceptional finance costs 6 – (23.1)Finance income 7 5.1 4.7

Profit before tax 82.0 23.5 Tax 8 (27.3) (10.1)Profit/(loss) for the year from discontinued operations 9 24.6 (61.2)

Profit/(loss) for the year after tax and discontinued operations 79.3 (47.8)

(1) Restated to include the results of Logistex Europe within discontinued operations. (2) Long term incentive plans. (3) As defined on the Income Statement.

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5 Segment information continued

Total assets Total liabilities

Restated(1) Restated(1) 31 December 31 December 1 January 31 December 31 December 1 January 2009 2008 2008 2009 2008 2008 £m £m £m £m £m £m

Continuing operationsEnergy 649.7 761.5 – 242.1 302.6 –Lifting 730.2 838.0 – 175.5 206.7 –Dynacast 329.1 349.1 322.9 87.3 83.4 80.7Other Industrial 149.3 172.0 31.5 89.3 95.8 11.1Central – corporate 186.4 255.8 27.9 679.5 889.0 42.2Central – LTIPs(2) – – – 7.7 4.7 1.5

Total continuing operations 2,044.7 2,376.4 382.3 1,281.4 1,582.2 135.5

Discontinued operations – 158.2 32.4 – 144.9 11.7

Total 2,044.7 2,534.6 414.7 1,281.4 1,727.1 147.2

(1) Restated to reflect the finalisation of the acquisition accounting of FKI plc and to include the assets and liabilities of Logistex Europe within discontinued operations. (2) Long term incentive plans.

Depreciation and computer Capital expenditure software amortisation

Restated(1) Restated(1)

Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2009 2008 2009 2008 £m £m £m £m

Continuing operationsEnergy 9.6 8.5 7.5 3.8Lifting 6.3 5.0 9.2 4.5Dynacast 3.7 8.0 8.8 7.7Other Industrial 4.1 7.9 7.4 4.1Central – corporate 0.1 0.9 0.7 0.4

Total continuing operations 23.8 30.3 33.6 20.5

Discontinued operations 1.3 4.0 2.4 4.2

Total 25.1 34.3 36.0 24.7


Geographical informationThe Group operates in various geographical areas around the world. The Group’s country of domicile is the UK and the Group’s revenue in the US is also considered to be material.

The Group’s revenue from external customers and information about its segment assets (non-current assets excluding interests in joint ventures, deferred tax assets and derivative financial assets) by geographical location are detailed below:

Revenue from external customers(1) Non-current assets


Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2009 2008 2009 2008 £m £m £m £m

UK 473.8 274.4 377.8 389.2US 343.3 235.0 531.9 622.0Other 481.4 385.9 526.9 568.1

Total 1,298.5 895.3 1,436.6 1,579.3

(1) From continuing operations.(2) Restated to include the results of Logistex Europe within discontinued operations.(3) Restated to reflect the finalisation of the acquisition accounting of FKI plc.



6 Exceptional costs and income

Year ended Year ended 31 December 31 December 2009 2008

Exceptional costs £m £m

Continuing operationsLabour related one-off costs (15.4) –Restructuring costs (8.5) (4.9)FKI head office closure – (8.0)

Total exceptional costs (23.9) (12.9)

During the year, the Group incurred £15.4 million of labour related one-off costs, relating primarily to headcount reductions, in response to the economic downturn. In addition, the Group incurred £8.5 million of costs relating to restructuring programmes which include plant closures and relocations.

During 2008, £4.9 million of restructuring costs relating to the acquisition and integration of the Fishercast businesses, the restructuring of investment assets held in the captive insurance company and the disposal of certain assets and liabilities held within the Lifting and Other Industrial segments were incurred.

Following the acquisition of FKI in 2008, the Company made the decision to close the FKI head office resulting in a cost of £8.0 million.


Exceptional income £m £m

Continuing operationsUS retiree benefit plan closures 9.0 –Release of fair value provisions 5.0 –

Total exceptional income 14.0 –

During the year, certain US retiree benefit plans have been closed resulting in a release of the future retirement benefit obligations relating to continuing operations of £9.0 million.

A review of fair value provisions at the Balance Sheet date identified £5.0 million of liabilities in excess of the amount now deemed required (note 20).


Exceptional finance costs £m £m

Continuing operationsEurobond refinance – (9.0)US private placements refinance – (8.9)Exceptional unwind of discount on provisions – (5.2)

Total exceptional finance costs – (23.1)

On 1 July 2008, the Group assumed FKI plc’s existing debt, which consisted of US Dollar denominated US private placements and bank debt plus a Euro denominated Eurobond. During 2008 both the US private placements and the Eurobond were redeemed and the existing bank debt was repaid and replaced.

Where material, provisions within the Group are discounted to net present value and the normal unwinding of the discount is shown within finance costs. During 2008, there was a significant reduction in international interest rates which was reflected by the Group in its discount rate and resulted in an additional exceptional discount charge of £5.2 million (note 20), reflecting the movement in interest rates.


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7 Revenues and expenses

Continuing operations Discontinued operations Total


Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2009 2008 2009 2008 2009 2008

Net operating expenses comprise: £m £m £m £m £m £m

Selling and distribution costs (78.1) (52.6) (11.9) (18.2) (90.0) (70.8)Administration expenses (127.5) (81.7) (10.2) (13.7) (137.7) (95.4)Share of results of joint ventures (note 14) 0.4 (0.1) – – 0.4 (0.1)Other operating costs – exceptional (note 6) (23.9) (12.9) (1.9) (23.1) (25.8) (36.0)Other operating income – exceptional (note 6) 14.0 – 7.7 – 21.7 –

Total net operating expenses (215.1) (147.3) (16.3) (55.0) (231.4) (202.3)





Operating profit is stated after charging: £m £m £m £m £m £m

Depreciation 32.7 20.0 2.4 4.2 35.1 24.2 Cost of inventories 970.3 677.9 148.3 166.1 1,118.6 844.0 Amortisation of other intangible assets 26.7 13.6 – 0.2 26.7 13.8 Amortisation of computer software 0.9 0.5 – – 0.9 0.5 Operating lease expense 8.6 4.4 0.7 1.5 9.3 5.9 Staff costs 353.8 230.3 34.0 47.1 387.8 277.4 Research and development costs 2.4 1.7 0.6 1.4 3.0 3.1 Loss on disposal of property, plant and equipment 0.4 – – – 0.4 –


The analysis of auditors’ remuneration is as follows:


£m £m

Fees payable to the Company’s auditors for the audit of the Company’s annual accounts 0.6 1.1Fees payable to the Company’s auditors and their associates for other services to the Group: – the audit of the Company’s subsidiaries pursuant to legislation 0.8 0.5

Total audit fees 1.4 1.6


£m £m

Tax services 1.6 1.4Corporate finance services 0.1 2.3Valuation and actuarial services – 0.1Other 0.2 0.3

Total non-audit fees 1.9 4.1

Fees for the audit of the Company’s accounts represent fees payable to Deloitte LLP in respect of the audit of the Company’s individual financial statements and the Group’s consolidated financial statements. Corporate finance services in the prior year relate to the acquisition of FKI plc and the sale of the Logistex US division.



7 Revenues and expenses continued

Restated(1)

Year ended Year ended 31 December 31 December 2009 2008 £m £m

Staff costs during the year (including Directors):Wages and salaries 287.0 185.9Social security costs 44.4 27.5Pension costs– defined benefit plans (note 23) 7.3 5.2– defined contribution plans (note 23) 15.1 11.7

Total continuing staff costs 353.8 230.3

Discontinued staff costs 34.0 47.1

Total continuing and discontinued staff costs 387.8 277.4


Restated(1)


Number Number

Average number of persons employedEnergy 3,558 3,633Lifting 2,886 3,575Dynacast 2,141 2,647Other Industrial 2,415 3,069Central – corporate 29 26

Total continuing operations 11,029 12,950

Discontinued operations 1,473 2,536

Total continuing and discontinued operations 12,502 15,486


The table above for 2008, reflects the average number of employees as if FKI plc were owned for the full year. The average numbers based on six month ownership were 8,105 for the continuing business and 1,560 for the discontinued businesses.

Restated(1)


£m £m

Finance costs and incomeInterest on bank loans and overdrafts (25.4) (23.0)Amortisation of costs of raising finance (2.1) (1.4)Interest on obligations under finance leases (0.1) (0.2)Fair value loss on financial instruments transferred from equity (0.4) (0.4)Net finance cost of pensions (6.6) (1.8)Unwinding of discount on provisions (note 20) (1.6) (0.8)Finance costs of Redeemable Preference C Shares – (0.2)Other finance costs – (0.4)

Total finance costs (36.2) (28.2)

Finance income (note 4) 5.1 4.7 Exceptional finance costs (note 6) – (23.1)

Total continuing operations (31.1) (46.6)

Discontinued operations (0.4) (1.1)

Total net finance cost (31.5) (47.7)


The finance cost of pensions is the interest cost on benefit obligations of £55.2 million net of the expected return on plan assets of £48.6 million (2008: £33.4 million and £31.6 million respectively).


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8 Tax




Analysis of charge/(credit) in year: £m £m £m £m £m £m

Current tax 26.2 21.1 1.6 (0.2) 27.8 20.9 Deferred tax (note 21) 1.1 (11.0) 4.1 (7.2) 5.2 (18.2)

Total income tax charge/(credit) 27.3 10.1 5.7 (7.4) 33.0 2.7

Tax charge on headline(2) operating profit after finance costs and income 36.1 21.8 2.2 0.2 38.3 22.0 Tax on net exceptional operating costs (1.3) (1.9) 3.5 (7.6) 2.2 (9.5)Tax on exceptional finance costs – (5.9) – – – (5.9)Tax in respect of intangible asset amortisation (7.5) (3.9) – – (7.5) (3.9)

Total income tax charge/(credit) 27.3 10.1 5.7 (7.4) 33.0 2.7

(1) Restated to include the results of Logistex Europe within discontinued operations. (2) As defined on the Income Statement.

Of the total tax charge for the year, £5.7 million (2008: credit of £7.4 million) related to trading in the discontinued divisions, which were disposed of during the year. No tax charge or credit arose on the profit (including the cumulative exchange movement recycled from equity) of £9.7 million on the disposal of the relevant subsidiaries.

The tax for the current and prior year is higher than the average standard rate of corporation tax in the UK for the year of 28.0% (2008: 28.5%). The differences are explained in the following table:

Restated(1)


£m £m

Profit/(loss) on ordinary activities before tax:Continuing operations 82.0 23.5 Discontinued operations (note 9) 20.6 (28.7)

102.6 (5.2)

Tax on profit/(loss) on ordinary activities at UK corporate tax rate 28.0% (2008: 28.5%) 28.7 (1.5)Tax effect of:Net permanent differences 2.0 (0.1)Non deductible exceptional items 1.2 3.6 Adjustment in respect of foreign tax rates 1.4 (1.0)Timing differences not previously recognised in deferred tax (5.8) 2.6 Prior year tax adjustments 5.5 (0.9)

Totaltaxchargefortheyear 33.0 2.7


In addition to the amount charged to the Income Statement, a credit of £13.0 million (2008: £3.6 million) has been recognised directly in the Statement of Comprehensive Income. This represents a tax credit of £15.3 million (2008: £0.8 million) in respect of retirement benefit obligations and a tax charge of £2.3 million (2008: credit of £2.8 million) in respect of movements on cash flow hedges.



9 Discontinued operationsDuring the year, the Group disposed of four trading operations acquired as part of the FKI acquisition. Three of these businesses were previously classified as held for sale and shown within discontinued businesses – Logistex US, Rhombus and Welland Forge. These businesses were disposed of in the first half of 2009 for a net gain, after the recycle of cumulative exchange differences, of £5.9 million. On 28 August 2009, the Group disposed of its interest in Logistex Europe for consideration, net of costs, of £23.6 million. Logistex Europe was previously presented within the Other Industrial segment and is now reported within discontinued operations.

Details of net assets disposed of and disposal proceeds are as follows:

Assets held for sale in Year ended Discontinued previous 31 December operations year 2009

£m £m £m

Intangible assets 0.1 0.1 0.2 Property, plant and equipment 10.9 26.9 37.8Inventories 6.6 18.5 25.1 Trade and other receivables 55.4 31.9 87.3 Derivative financial assets 2.9 – 2.9 Cash and cash equivalents 7.9 4.6 12.5

Gross assets disposed of 83.8 82.0 165.8

Trade and other payables (48.5) (43.3) (91.8)Retirement benefit obligations – (1.8) (1.8)Tax (0.3) (0.2) (0.5)Interest-bearing loans and borrowings (11.6) (0.3) (11.9)Provisions – (8.9) (8.9)

Gross liabilities disposed of (60.4) (54.5) (114.9)

Net assets disposed of 23.4 27.5 50.9Cumulative exchange translation difference recycled on disposals 3.6 7.8 11.4Profit/(loss) on disposal 0.2 (1.9) (1.7)

Consideration net of costs 23.6 25.6 49.2 Net borrowings/(cash) disposed of 3.7 (4.3) (0.6)

Cash inflow from current year disposals 27.3 21.3 48.6


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9 Discontinued operations continuedFinancial performance of discontinued operations:

Restated(1)


Notes £m £m

Revenue 4 185.6 193.5 Operating costs before exceptional items (170.4) (197.8)

Headline(2) operating profit/(loss) 15.2 (4.3)Intangible asset amortisation – (0.2)

Reported as exceptional items:Labour related one-off costs (1.9) – US retiree benefit plan closures 7.7 – Logistex US costs of sale – (1.5)Hickory closure – (20.8)Rhombus restructuring – (0.8)Net finance costs 7 (0.4) (1.1)

Profit/(loss) before tax 20.6 (28.7)Tax (charge)/credit 8 (5.7) 7.4

Profit/(loss) after tax 14.9 (21.3)Cumulative exchange difference recycled on disposals 25 11.4 8.9 Loss on disposal of net assets (1.7) (48.8)

Profit/(loss) for the year from discontinued operations 24.6 (61.2)


The prior year comparative includes the Logistex US, Logistex Europe, Rhombus and Welland Forge businesses disposed of during 2009 and the MVC business disposed of during 2008.

10 Dividends


£m £m

Final dividend for the year ended 31 December 2008 paid of 4.25p (2007: 4.25p) 21.1 5.7Interim dividend for the year ended 31 December 2009 paid of 2.90p (2008: 2.75p) 14.5 13.7

35.6 19.4Proposed second interim dividend for year ended 31 December 2009 of 4.80p (2008: nil) 23.9 –Proposed final dividend for the year ended 31 December 2009 of nil (2008: 4.25p) – 21.1

A proposed second 2009 interim dividend of 4.8 per Ordinary Share was approved by the Board on 9 March 2010 and, in accordance with IAS 10, has not been included as a liability in these financial statements.



11 Earnings per share

Restated(1)


Earnings Notes £m £m

Profit/(loss) for the purposes of basic earnings per share 79.5 (48.3)Less (profit)/loss for the year from discontinued operations 9 (24.6) 61.2

Earnings for basis of earnings per share from continuing operations 54.9 12.9 Exceptional costs – operating 6 23.9 12.9 Exceptional income – operating 6 (14.0) – Exceptional costs – finance 6 – 23.1 Intangible asset amortisation 26.7 13.6 Tax on both exceptional items and intangible asset amortisation (8.8) (11.7)

Earnings for basis of headline(2) earnings per share from continuing operations 82.7 50.8


Number Number

Weighted average number of Ordinary Shares for the purposes of basic earnings per share (million) 497.6 315.6Further shares for the purposes of fully diluted earnings per share (million) 10.4 –

Restated(1)


Earnings per share pence pence

Basic earnings per shareFrom continuing and discontinued operations 16.0 (15.3)From continuing operations 11.0 4.1 From discontinued operations 5.0 (19.4)

Fully diluted earnings per shareFrom continuing and discontinued operations 15.6 (15.3)From continuing operations 10.8 4.1 From discontinued operations 4.8 (19.4)

Headline(2) basic earnings per shareFrom continuing operations 16.6 16.1

Headline(2) fully diluted earnings per shareFrom continuing operations 16.3 16.1



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12 Goodwill and other intangible assets

Other intangible Computer Goodwill assets software Total

£m £m £m £m

CostAt 1 January 2008 183.5 28.8 1.3 213.6 Additions – – 0.5 0.5 Acquisitions 521.6 375.6 1.4 898.6 Disposal of businesses (21.3) (1.5) (0.1) (22.9)Exchange adjustments 145.6 75.0 0.4 221.0

At 31 December 2008 restated(1) 829.4 477.9 3.5 1,310.8 Additions – – 0.9 0.9 Disposals – – (0.7) (0.7)Disposal of businesses – – (1.3) (1.3)Exchange adjustments (50.2) (28.1) 0.1 (78.2)

At 31 December 2009 779.2 449.8 2.5 1,231.5

AmortisationAt 1 January 2008 – (5.4) (0.8) (6.2)Charge for period – (13.8) (0.5) (14.3)Disposal of businesses – 1.0 0.1 1.1 Exchange adjustments – (3.7) (0.3) (4.0)

At 31 December 2008 restated(1) – (21.9) (1.5) (23.4)Charge for the period – (26.7) (0.9) (27.6)Disposals – – 0.7 0.7 Disposal of businesses – – 1.2 1.2 Exchange adjustments – 1.9 – 1.9

At 31 December 2009 – (46.7) (0.5) (47.2)

Net book value at 31 December 2009 779.2 403.1 2.0 1,184.3

At 31 December 2008 restated(1) 829.4 456.0 2.0 1,287.4

At 1 January 2008 183.5 23.4 0.5 207.4

(1) Restated to reflect the finalisation of the acquisition accounting of FKI plc.

Other intangible assets include patented technology, customer relationships and trade names.

Goodwill has been allocated to the business segments, each of which comprises several cash-generating units as follows:

Restated(1)

31 December 31 December 1 January 2009 2008 2008

£m £m £m

Energy 245.1 253.4 –Lifting 292.6 313.5 –Dynacast 203.5 222.6 164.5Other Industrial 38.0 39.9 3.2Discontinued – – 15.8

779.2 829.4 183.5




12 Goodwill and other intangible assets continuedThe Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amounts of the cash-generating units are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. The Company estimates discount rates using rates that reflect current market assessments of the time value of money and the risks specific to each cash-generating unit. The growth rates are based on a prudent estimate of long-term industry growth forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The Group prepares cash flow forecasts derived from financial budgets approved by management and extrapolates cash flows based on estimated growth rates of between 2% and 3%. This rate does not exceed the average long-term growth rate for the relevant markets. The pre-tax discount rate applied is between 7% and 9% depending on the risk elements associated with each cash-generating unit. No impairment was identified and a reasonable possible change in the assumptions applied would not result in any impairment.

Acquisition of subsidiariesOn 1 July 2008, the Group acquired 100% of the issued share capital of FKI plc. During 2009, the Group finalised the acquisition accounting for items calculated on a provisional basis at 31 December 2008 and has recorded adjustments to the opening Balance Sheet of the FKI Group net assets acquired. These adjustments are primarily in relation to the reduction of fixed assets and inventory values and additional liabilities which increase goodwill by £7.9 million.

The following assets and liabilities were acquired:

Original Acquiree’s fair value Original fair Subsequent Revised fair carrying amount adjustments value adjustments value

£m £m £m £m £m

FKIProperty, plant and equipment 219.1 (21.9) 197.2 (5.0) 192.2 Intangible assets and computer software 74.3 302.7 377.0 – 377.0 Derivative financial assets 38.6 – 38.6 – 38.6 Associate investments 0.9 (0.5) 0.4 – 0.4 Inventories 181.1 56.8 237.9 (1.4) 236.5 Trade and other receivables 340.5 (57.5) 283.0 – 283.0 Cash and cash equivalents 85.3 – 85.3 – 85.3 Trade and other payables (310.6) (32.1) (342.7) 4.4 (338.3)Provisions (25.8) (104.6) (130.4) (5.9) (136.3)Deferred tax (22.4) (86.4) (108.8) – (108.8)Retirement benefit obligations (20.6) (75.1) (95.7) – (95.7)Current tax liabilities (33.0) 19.1 (13.9) – (13.9)Interest-bearing loans and borrowings (597.2) 8.4 (588.8) – (588.8)Assets held for sale 92.6 (44.5) 48.1 – 48.1

22.8 (35.6) (12.8) (7.9) (20.7)

Goodwill 511.5 7.9 519.4

Total consideration (including directly attributable acquisition costs of £13.6 million) 498.7

Satisfied by:Shares issued 248.4 Cash consideration (including directly attributable acquisition costs of £13.6 million) 250.3

Total 498.7

On 22 August 2008, the Group acquired the trade and assets of Fishercast Global operating in Canada and the UK. There have been no adjustments to the opening Balance Sheet in the current year.


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13 Property, plant and equipment

Land and Plant and buidlings equipment Total

£m £m £m

CostAt 1 January 2008 16.4 73.0 89.4 Additions 3.1 30.4 33.5 Acquisitions 92.0 102.1 194.1 Disposal of businesses (5.1) (25.0) (30.1)Disposals (0.3) (2.7) (3.0)Exchange adjustments 17.2 51.2 68.4

At 31 December 2008 restated(1) 123.3 229.0 352.3 Additions 4.4 19.2 23.6 Disposal of businesses (8.4) (3.7) (12.1)Disposals (0.4) (4.7) (5.1)Exchange adjustments (6.3) (14.0) (20.3)

At 31 December 2009 112.6 225.8 338.4

DepreciationAt 1 January 2008 (1.8) (26.9) (28.7)Charge for the period (1.9) (18.8) (20.7)Charge for the period on disposals – (2.0) (2.0)Disposal of businesses 0.7 6.2 6.9 Disposals – 2.1 2.1 Exchange adjustments (0.8) (17.2) (18.0)

At 31 December 2008 restated(1) (3.8) (56.6) (60.4)Charge for the period (3.2) (30.4) (33.6)Impairments – (0.4) (0.4)Disposal of businesses 0.3 0.9 1.2 Disposals – 3.7 3.7 Exchange adjustments 0.3 3.1 3.4

At 31 December 2009 (6.4) (79.7) (86.1)

Net book valueat 31 December 2009 106.2 146.1 252.3

At 31 December 2008 restated(1) 119.5 172.4 291.9

At 1 January 2008 14.6 46.1 60.7


The net carrying amount of plant and equipment includes nil (31 December 2008: £0.4 million, 1 January 2008: £1.5 million) in respect of assets held under finance leases.



14 Interests in joint ventures


£m £m £m

Aggregated amounts relating to joint ventures:Total assets 3.0 4.0 – Total liabilities (2.7) (3.9) –

Interests in joint ventures 0.3 0.1 –

Share of joint venture revenues 3.7 1.0 1.7Share of profit/(loss) 0.4 (0.1) 0.2Dividends received (0.2) (0.2) –

A list of all the significant investments in subsidiaries including the name, country of incorporation and proportion of ownership interest is given in note 3 to the Company’s separate financial statements.

15 Inventories

Restated(1)


£m £m £m

Raw materials 54.2 87.2 11.3Work in progress 88.5 138.8 8.3Finished goods 79.9 101.9 10.1

222.6 327.9 29.7


There is no material difference between the Balance Sheet value of inventories and their replacement cost.

Long-term contracts


£m £m £m

Contracts in progress at the Balance Sheet date:Amounts due from contract customers included in trade and other receivables 4.1 16.5 –Amounts due to contract customers included in trade and other payables (12.4) (8.1) –

(8.3) 8.4 –

Contract costs incurred plus recognised profit less recognised losses to date 19.7 468.0 –Less progress billings (28.0) (459.6) –

(8.3) 8.4 –

The average life of long-term contracts is 2 – 3 years.


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16 Trade and other receivables


£m £m £m

Trade receivables 197.6 295.8 64.0 Allowance for doubtful receivables (8.1) (11.1) (3.1)Other receivables 12.5 34.7 4.7 Prepayments 11.0 16.4 1.4

213.0 335.8 67.0

Trade receivables are non-interest bearing. Credit terms offered to customers vary upon the country of operation but are generally between 30 and 90 days.

An allowance has been made for estimated irrecoverable amounts made with reference to past default experience and management’s assessment of credit worthiness, an analysis of which is as follows:

Other Energy Lifting Dynacast Industrial Central Discontinued Total

£m £m £m £m £m £m £m

At 1 January 2008 – – 2.2 0.6 – 0.3 3.1 Acquired 3.9 1.3 – 1.2 0.2 – 6.6 Income Statement charge 0.8 0.9 0.8 0.7 0.2 – 3.4 Disposed – – – – – (0.4) (0.4)Utilised (1.0) (0.4) (1.1) (0.3) (0.2) – (3.0)Exchange differences 0.4 0.2 0.5 0.2 – 0.1 1.4

At 31 December 2008 4.1 2.0 2.4 2.4 0.2 – 11.1

Income Statement charge 0.4 0.6 0.6 0.5 – – 2.1 Utilised (1.5) (1.2) (0.6) (1.3) (0.1) – (4.7)Exchange differences (0.2) – (0.1) (0.1) – – (0.4)

At 31 December 2009 2.8 1.4 2.3 1.5 0.1 – 8.1

The concentration of credit risk is limited due to the number of customers being high and because they are unrelated to each other.


Ageing of impaired trade receivables past due £m £m £m

0 – 30 days 1.1 1.5 0.431 – 60 days 1.0 1.4 0.360+ days 6.0 8.2 2.4

8.1 11.1 3.1

Included in the Group’s trade receivables balance are overdue trade receivables with a carrying amount of £44.2 million (31 December 2008: £81.6 million, 1 January 2008: £15.7 million) against which an appropriate provision of £8.1 million (31 December 2008: £11.1 million, 1 January 2008: £3.1 million) is held.



16 Trade and other receivables continuedThe balance deemed recoverable of £36.1 million (31 December 2008: £70.5 million, 1 January 2008: £12.6 million) is past due as follows:


£m £m £m

0 – 30 days 28.7 38.1 9.931 – 60 days 4.5 15.2 1.760+ days 2.9 17.2 1.0

36.1 70.5 12.6

The Directors consider that the carrying amount of trade and other receivables, including amounts not past due and not impaired, is considered to be their fair value.

17 Cash and cash equivalents


£m £m £m

Cash and cash equivalents 147.5 165.7 46.4

Cash and cash equivalents comprises cash at bank and in hand which earns interest at floating rates based on daily bank deposit rates and short-term deposits which are made for varying periods of between one day and one month and earn interest at the respective short-term deposit rates. The carrying amount of these assets is considered to be equal to their fair value.

18 Trade and other payables

Restated(1)


Current £m £m £m

Trade payables 126.8 222.7 43.3Other payables 96.1 111.1 9.7Other taxes and social security 8.8 16.1 3.1Accruals 87.8 93.8 21.8

319.5 443.7 77.9


Trade payables are non-interest bearing. Normal settlement terms vary by country but are usually between 30 and 90 days. Other payables are non-interest bearing and have an average term of approximately 60 days.

The Directors consider that the carrying amount of trade payables approximates to their fair value.


Non-current £m £m £m

Other payables 0.3 1.4 –Other taxes and social security – 0.1 –Accruals 1.5 1.6 –

1.8 3.1 –


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19 Interest-bearing loans and borrowingsThis note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. Details of the Group’s exposure to credit, interest rate, foreign currency and liquidity risk are included in note 24.

Current Non-current Total

31 December 31 December 1 January 31 December 31 December 1 January 31 December 31 December 1 January 2009 2008 2008 2009 2008 2008 2009 2008 2008

£m £m £m £m £m £m £m £m £m

Fixed rate obligationsEuro loan (Austria)(1) 0.3 0.6 0.5 0.5 0.9 1.3 0.8 1.5 1.8Redeemable Preference C shares(2) – – 7.2 – – – – – 7.2

0.3 0.6 7.7 0.5 0.9 1.3 0.8 1.5 9.0

Floating rate obligationsBank borrowings – US Dollar loan(3) – – – 374.1 469.8 – 374.1 469.8 –Bank borrowings – Euro loan(4) – – – 51.6 198.4 – 51.6 198.4 –Bank borrowings – Sterling loan(5) – – – 50.0 50.0 – 50.0 50.0 –Bank borrowings – Sterling loan(6) – – – – – 11.0 – – 11.0Finance leases 1.0 0.1 0.4 – 1.1 0.8 1.0 1.2 1.2

1.0 0.1 0.4 475.7 719.3 11.8 476.7 719.4 12.2

Unamortised finance costs – – – (8.3) (10.4) – (8.3) (10.4) –

Total interest bearing loans and borrowings 1.3 0.7 8.1 467.9 709.8 13.1 469.2 710.5 21.2

(1) Interest rate 1.5%, final maturity July 2011. (2) Matured June 2008. (3) Interest rate LIBOR +1.75%, final maturity April 2013. (4) Interest rate EURIBOR +1.75%, final maturity April 2013. (5) Interest rate LIBOR +1.75%, final maturity April 2013. (6) Repaid July 2008.

The Group arranged a £750 million multi-currency committed bank facility on the acquisition of FKI plc. This provides term loan and revolving facilities through to 22 April 2013. A number of Group companies act as guarantors to this facility. Drawdowns bear interest at interbank rates of interest plus a margin determined by reference to the Group’s performance under its debt cover covenant ratio and ranges between 1.25% and 2.35%. The margin as at 31 December 2009 was 1.75%.

Throughout the year, the Group remained compliant with all covenants under these facilities. The term loan facility is fully drawn down having originally been set at £500 million. During the year the Group repaid and cancelled US $80.0 million of the term loan facility following the sale of the Logistex businesses. During 2009, all drawings under the £250 million revolving facility were repaid following strong operational cash generation in the Group, leaving only £25.1 million of this facility utilised for documentary credits. At 31 December 2009, the undrawn amount of the revolving facility was £224.9 million (31 December 2008: £108.6 million, 1 January 2008: £25.0 million).

The interest rate re-pricing profile of financial liabilities, after taking into account hedging interest rate derivatives, is described in note 24.

Maturity of financial liabilitiesThe maturity profile of anticipated future cash flows including interest in relation to the Group’s financial liabilities, on an undiscounted basis and which, therefore, differs from both the carrying value and fair value is shown in the table over the page. Interest on floating rate debt is based on a 1 month LIBOR curve for each currency, while interest on hedging interest rate swaps is based on the relevant forward LIBOR curve.

Finance lease liabilities are secured by the assets leased, are Euro denominated and are a mix of floating and fixed interest rate debt with remaining repayment periods not exceeding one year.



19 Interest-bearing loans and borrowings continued

Total Finance Redeemable interest-bearing Other Derivative Total lease Preference C loans and financial financial financial Bank loans obligations Shares borrowings liabilities(1) liabilities liabilities £m £m £m £m £m £m £m

Within one year 14.9 1.0 – 15.9 319.5 2.8 338.2 In one to two years 20.1 – – 20.1 1.8 0.1 22.0 In two to three years 53.3 – – 53.3 – – 53.3 After three years 456.4 – – 456.4 – 0.1 456.5 Effect of financing rates (76.5) – – (76.5) – – (76.5)

31 December 2009 468.2 1.0 – 469.2 321.3 3.0 793.5

Within one year 19.1 0.1 – 19.2 443.7 25.3 488.2 In one to two years 33.5 1.1 – 34.6 3.1 – 37.7 In two to three years 33.4 – – 33.4 – – 33.4 After three years 776.2 – – 776.2 – – 776.2 Effect of financing rates (152.9) – – (152.9) – – (152.9)

31 December 2008 709.3 1.2 – 710.5 446.8 25.3 1,182.6

Within one year 1.1 0.4 7.4 8.9 77.9 – 86.8 In one to two years 1.0 0.4 – 1.4 – – 1.4 In two to three years 11.7 0.4 – 12.1 – – 12.1 After three years 0.4 0.1 – 0.5 – – 0.5 Effect of financing rates (1.4) (0.1) (0.2) (1.7) – – (1.7)

1 January 2008 12.8 1.2 7.2 21.2 77.9 – 99.1


20 Provisions

Surplus Environmental Incentive FKI leasehold and scheme captive property costs legal costs related insurance Other Total Notes £m £m £m £m £m £m

At 1 January 2008 1.1 0.6 1.5 – 3.8 7.0 Acquisition of businesses 22.2 50.9 – 22.3 41.3 136.7 Disposal of businesses – – – – (2.0) (2.0)Utilised (1.4) (1.7) (4.1) – (28.0) (35.2)Arising in the year 0.5 0.3 6.4 5.7 19.4 32.3 Unwind of discount 7 0.5 0.3 – – – 0.8 Change of discount rate 6 0.8 4.4 – – – 5.2 Exchange differences 3.8 7.8 0.9 – 1.6 14.1

At 31 December 2008 restated(1) 27.5 62.6 4.7 28.0 36.1 158.9 Utilised (6.1) (5.2) (4.4) (7.0) (15.3) (38.0)Release unutilised(2) – – – (0.8) (4.2) (5.0)Arising in the year(3) 9.4 1.7 7.5 – 13.6 32.2 Unwind of discount 7 1.1 0.5 – – – 1.6 Exchange differences (1.5) (3.0) (0.1) – (0.9) (5.5)

At 31 December 2009 30.4 56.6 7.7 20.2 29.3 144.2

Current 7.7 13.0 – 5.2 18.7 44.6 Non-current 22.7 43.6 7.7 15.0 10.6 99.6

30.4 56.6 7.7 20.2 29.3 144.2

(1) Restated to reflect the finalisation of the acquisition accounting of FKI plc. (2) Released to exceptional income (note 6). (3) Of the £32.2 million provisions arising in the year, surplus leasehold property costs include £6.0 million reclassified from assets held for sale at 31 December 2008.

This property will be retained within the Group for the foreseeable future. In addition, £1.7 million of liabilities have been reclassified from other payables.


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20 Provisions continuedThe provision for surplus leasehold property costs is the estimated net rentals payable over the period of the leases, together with any dilapidation costs.

Environmental and legal provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims.

Incentive scheme related provisions are in respect of long term incentive plans for divisional senior management.

The FKI captive insurance provision relates to known and actuarial assessments of future claims covered by the captive including, but not limited to, public and product liability, employer’s liability in the UK, workers’ compensation in the US and automotive claims in the UK and US.

Other provisions relate primarily to onerous contracts and restructuring costs to be incurred.

Where appropriate, provisions have been discounted using a discount rate of 3% – 6% (31 December 2008: 3% – 6%, 1 January 2008: 6%).

21 Deferred taxThe following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and prior reporting period.

Deferred tax assets Deferred tax liabilities

Accelerated capital Deferred tax Tax losses and allowances and on intangible Total deferred Total net other assets other liabilities assets tax liabillities deferred tax

Notes £m £m £m £m £m

At 1 January 2008 3.1 (1.5) (6.6) (8.1) (5.0)Credit to income 8 10.7 3.6 3.9 7.5 18.2(Charge)/credit to equity (0.2) 3.8 – 3.8 3.6Intercategory transfers 0.3 (0.3) – (0.3) –Acquisitions 9.1 (12.9) (105.0) (117.9) (108.8)Exchange differences 6.8 (1.2) (20.0) (21.2) (14.4)

At 31 December 2008 29.8 (8.5) (127.7) (136.2) (106.4)(Charge)/credit to income 8 (10.7) (2.0) 7.5 5.5 (5.2)Credit/(charge) to equity 7.4 (2.3) – (2.3) 5.1 Disposal (2.0) – – – (2.0)Exchange differences (2.4) 0.4 7.3 7.7 5.3

At 31 December 2009 22.1 (12.4) (112.9) (125.3) (103.2)

As at 31 December 2009, the Group has gross unused tax losses of £251.4 million (2008: £392.5 million) available for offset against future profits. A deferred tax asset of £3.8 million (2008: £18.6 million) has been recognised in respect of losses of £13.6 million, together with an asset of £18.3 million (2008: £11.2 million) on other timing differences. No deferred tax asset has been recognised in respect of the remaining £237.8 million (2008: £339.0 million) due to the divisional and geographic split of anticipated future profit streams. These losses may be carried forward indefinitely, subject to certain continuity of business requirements.

A significant part of the retirement benefit obligations recognised in the Group accounts relates to the McKechnie UK Plan, the FKI UK Plans and the FKI US Pension Plan. A deferred tax asset of £7.4 million (2008: £1.0 million) has been recognised on these obligations to the extent that they are expected to generate tax deductions against foreseeable profits.

As at 31 December 2009, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was £4.0 million (2008: £3.8 million). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future.



22 Share-based paymentsMelrose 2009 Incentive SchemeOn 14 August 2007, a share incentive scheme was approved (the “2007 Incentive Scheme”) which was due to expire on 31 May 2012. On 14 May 2009, pursuant to a shareholder resolution passed at a General Meeting on that date, the 2007 Incentive Shares of £1 each were repurchased at their nominal value and each holder of 2007 Incentive Shares subscribed for the same number of 2009 Incentive Shares at their nominal value. The rights attaching to the 2009 Incentive Shares are identical to those attaching to the 2007 Incentive Shares, with theexception that the Company may pay a dividend on the 2009 Incentive Shares as an alternative to converting them into Ordinary Shares and the holders may not request early conversion in 2010 and/or 2011. This has not resulted in a change to fair value.

The 2009 Incentive Shares were issued to Directors, senior management and Ogier Employee Benefit Trustee Limited, as trustee of the Melrose PLC Employee Benefit Trust.

The 2009 Incentive Shares do not confer a right to be paid an annual dividend, nor the right to vote at a general meeting. On winding up, the holders are entitled to participate in the Company’s assets equal to an amount to which they would have been entitled if their 2009 Incentive Shares had crystalised as at the date of winding up. Further details of the 2009 Incentive Shares can be found in the Remuneration report on pages 40 to 43.

The estimated fair value attributable to the 2009 Incentive Shares (formerly the 2007 Incentive Shares) using a Black Scholes option pricing model at 31 December 2009 was £21.0 million (31 December 2008: £1.0 million, 1 January 2008: £3.7 million).

The inputs into the Black Scholes model used to fair value the Scheme when it was originally established in 2007 were as follows:

Valuation assumptions

Weighted average share price £1.67Weighted average exercise price £1.00Expected volatility 25.0%Expected life as at inception 4.8yrsRisk free interest 2.0%Expected dividend yield 3.2%

Expected volatility was determined by calculating the historical volatility of the Company’s share price.

The Group recognised total expenses of £1.8 million (2008: £2.0 million) in relation to equity-settled share-based payment transactions in 2009 including National Insurance charges of nil (2008: £0.2 million).

23 Retirement benefit obligationsMelrose holds several pension plans covering many of its employees and operating in several jurisdictions.

The most significant defined benefit plans for continuing operations are:

The FKI UK Pension Plans which include the FKI UK Pension Plan, the Cleco Plan and the Bridon Group Senior Executive Plan. These are defined benefit in type and are funded plans where the future liabilities for members’ benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds. The McKechnie UK Pension Plan. This is defined benefit in type and is a funded plan (other than £3.3 million of unfunded liabilities) where the future liabilities for members’ benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds. The FKI US Pension Plan. This is defined benefit in type and is a funded plan where the future liabilities for members’ benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds.

Other plans include the Dynacast US defined plan and a number of funded and unfunded defined benefit arrangements across Europe.

Further details of the status of the significant plans are disclosed in the Directors’ report on pages 28 to 35.

The cost of these plans is determined in accordance with IAS 19 with the advice of independent professionally qualified actuaries on the basis of formal actuarial valuations using the projected unit credit method. In line with normal practice, these valuations are undertaken triennially in the UK and annually in the US.

The valuations are based on the preliminary UK full actuarial valuations as of 31 December 2008 updated at 31 December 2009 by independent actuaries and US full actuarial valuations as of 1 January 2009 updated at 31 December 2009 by independent actuaries.


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23 Retirement benefit obligations continuedThe Group also operates unfunded retiree medical and welfare benefit plans, principally in the US. However, during the year, a number of these plans have been terminated.

In addition to this, there are a number of defined contribution plans across the Group. Contributions during the year were £15.1 million (2008: £11.7 million).

The major weighted average assumptions used by the actuaries in calculating the Group’s pension plan assets and liabilities are as set out below:

31 December 2009

FKI US US Retiree FKI UK McKechnie Pension Benefit Other Plans UK Plan Plan Plans plans

% p.a. % p.a. % p.a. % p.a. % p.a.

Rate of increase in salaries 3.95 3.95 3.25 n/a 2.60Rate of increase in pensions in payment 3.30 3.45 n/a n/a n/aDiscount rate 5.75 5.75 5.80 5.80 5.50Inflation assumption 3.45 3.45 2.75 n/a 2.60

31 December 2008

FKI US US Retiree FKI UK McKechnie Pension Benefit Other Plans UK Plan Plan Plans plans

% p.a. % p.a. % p.a. % p.a. % p.a.

Rate of increase in salaries 3.25 3.25 3.25 n/a 3.00Rate of increase in pensions in payment 2.90 2.90 n/a n/a n/aDiscount rate 6.30 6.30 6.25 6.25 5.60Inflation assumption 2.75 2.75 2.75 n/a 2.00

31 December 2007

McKechnie Other UK Plan plans

% p.a. % p.a.

Rate of increase in salaries 3.80 3.00Rate of increase in pensions in payment 3.30 1.90Discount rate 5.70 5.90Inflation assumption 3.30 2.30

Mortality

FKI UK Plan Mortality assumptions for the most significant plan in the Group, the FKI UK Plan, as at 31 December 2009 are based on 90% of the “heavy” Self Administered Pension Scheme (SAPS) tables, reflecting the plan membership being largely employed in the industrial sector. Future improvements are in line with 80% (60% for women) of the Long Cohort, subject to a minimum underpin of 1% p.a.

The assumptions are that a member currently aged 65 will live on average for a further 20.1 years if they are male and for a further 23.5 years if they are female. For a member who retires in 2024 at age 65, the assumptions are that they will live for a further 21.7 years after retirement if they are male and for a further 24.9 years after retirement if they are female.

The mortality assumptions are in line with those adopted for the draft triennial valuation results as at 31 December 2008.

SensitivitiesSensitivities around movements in the principal assumptions of the discount rate, inflation rate and mortality are discussed in the Finance Director’s review.



23 Retirement benefit obligations continuedThe amount recognised in the Balance Sheet arising from net liabilities in respect of defined benefit plans is as follows:

31 December 31 December 31 December 31 December 31 December 2009 2008 2007 2006 2005

£m £m £m £m £m

Plan liabilities (1,033.5) (939.7) (148.4) (147.9) (145.5)Plan assets 864.4 810.5 123.2 92.5 85.0 Limit on pension plan surplus – (14.1) – – –

Net liabilities (169.1) (143.3) (25.2) (55.4) (60.5)

In the prior year, in accordance with IAS 19, the value of the assets held within the McKechnie UK Plan were limited by £14.1 million to show a deficit on the Plan equal to the remaining committed contributions. This limit is no longer required at 31 December 2009 because the net deficit on the Plan now exceeds the remaining committed contributions.

The five year history of experience adjustments is as follows:


£m £m £m £m £m

Experience adjustments on plan liabilities (130.9) 70.7 1.2 (0.5) (5.5)Experience adjustments on plan assets 41.0 (78.9) 2.3 1.7 7.7

The plan liabilities and assets at 31 December 2009 were split by plan as follows:

FKI US US Retiree FKI UK McKechnie Pension Benefit Other Plans UK Plan Plan Plans plans Total

£m £m £m £m £m £m

Plan liabilities (660.6) (140.2) (191.4) (4.7) (36.6) (1,033.5)Plan assets 543.5 128.1 174.4 – 18.4 864.4

Net liabilities (117.1) (12.1) (17.0) (4.7) (18.2) (169.1)

This amount is presented in the Balance Sheet:


£m £m £m £m £m

Net liabilities– unfunded plans 24.2 45.2 4.1 10.9 8.7– funded plans 144.9 84.0 21.1 44.5 51.8Limit on pension plan surplus – 14.1 – – –

169.1 143.3 25.2 55.4 60.5

Expected returns and fair value of assets:

Expected return Fair value of assets

31 December 31 December 31 December 31 December 2009 2008 2009 2008

% % £m £m

Equity instruments 8.5 8.3 312.1 230.1Debt instruments 4.8 5.3 440.7 473.5Other assets 6.1 6.4 111.6 106.9

Weighted average/total 6.3 6.3 864.4 810.5

The expected return on plan assets at 31 December 2009 is based on market expectations at 1 January 2010 for returns on assets over the entire life of the obligation.

There is no self investment (other than in tracker funds) either in the Group’s own financial instruments or property or other assets used by the Group.


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23 Retirement benefit obligations continuedAmounts recognised in income in respect of these defined benefit plans are as follows:


£m £m

In arriving at operating profit (included within cost of sales, selling and distribution costs and administrative expenses):– current service cost 7.3 5.2 – effects of curtailments and settlements (3.4) – Included within net finance costs:– interest cost 55.2 33.4 – expected return on assets (48.6) (31.6)Included within exceptional income:– effects of curtailment and settlements (9.0) – Included within profit from discontinued operations:– effects of curtailments and settlements (11.1) –

The actual return on plan assets was a gain of £89.6 million (2008: loss of £47.3 million).

The amount recognised in the Statement of Comprehensive Income is as follows:


£m £m

Actuarial (losses)/gains on plan liabilities (130.9) 70.7 Actuarial gains/(losses) on plan assets 41.0 (78.9)

(89.9) (8.2)Limit on pension plan surplus 14.1 (14.1)

(75.8) (22.3)

The cumulative amount of actuarial gains and losses now recognised in the Statement of Comprehensive Income is a total loss of £91.2 million (2008: £15.4 million).

Movements in the present value of defined benefit obligations during the year:


£m £m

At beginning of year 939.7 148.4 Acquisition – 781.7 Disposals (1.8) (2.4)Current service cost 7.3 5.2 Interest cost 55.2 33.4 Actuarial loss/(gain) 130.9 (70.7)Benefits paid (48.3) (25.7)Plan curtailments (23.5) – Currency (gain)/loss (26.0) 69.8

At end of year 1,033.5 939.7



23 Retirement benefit obligations continuedMovements in the fair value of plan assets during the year:


£m £m

At beginning of year 810.5 123.2 Acquisition – 686.0 Disposals – (1.5)Expected return on assets 48.6 31.6 Actuarial gains/(losses) 41.0 (78.9)Contributions 32.1 20.0 Benefits paid (48.3) (25.7)Currency (loss)/gain (19.5) 55.8

At end of year 864.4 810.5

The Company has guaranteed a schedule of contributions of £6.1 million per annum with the Trustee of the McKechnie Pension Plan up until May 2010. In addition, the Company contributes £18.0 million per annum to the FKI UK Pension Plan.

24 Financial instruments and risk managementThe table below sets out the Group’s accounting classification of each category of financial assets and liabilities and their fair values at 31 December 2009, 31 December 2008 and 1 January 2008:

Other Total Assets held Energy Lifting Dynacast Industrial Central MVC continuing for sale Total

£m £m £m £m £m £m £m £m £m

31 December 2009Financial assetsCash and cash equivalents – – – – 147.5 – 147.5 – 147.5 Trade receivables 72.0 60.0 34.1 23.0 0.4 – 189.5 – 189.5 Derivative financial assets 0.6 0.4 0.5 – 1.1 – 2.6 – 2.6 Financial liabilities Bank loans – – (0.8) – (467.4) – (468.2) – (468.2)Finance lease obligations – (1.0) – – – – (1.0) – (1.0)Derivative financial liabilities (1.4) (1.1) (0.2) – (0.3) – (3.0) – (3.0)Other financial liabilities (102.1) (68.8) (60.4) (48.2) (41.8) – (321.3) – (321.3)

31 December 2008 Financial assets Cash and cash equivalents – – – – 165.7 – 165.7 2.0 167.7 Trade receivables 117.3 70.2 39.7 57.2 0.3 – 284.7 27.3 312.0 Derivative financial assets 0.5 0.4 0.1 2.1 – – 3.1 – 3.1 Financial liabilities Bank loans – – (1.8) – (707.5) – (709.3) (0.3) (709.6)Finance lease obligations – (1.2) – – – – (1.2) – (1.2)Derivative financial liabilities (11.3) (8.0) (1.8) (4.2) – – (25.3) – (25.3)Other financial liabilities(1) (150.3) (83.9) (57.6) (124.8) (30.2) – (446.8) (48.9) (495.7)

1 January 2008Financial assetsCash and cash equivalents – – 28.8 4.8 26.6 (13.8) 46.4 – 46.4 Trade receivables – – 42.8 8.3 0.1 9.7 60.9 – 60.9 Derivative financial assets – – 0.7 (0.4) 0.1 – 0.4 – 0.4 Financial liabilitiesBank loans – – (1.8) – (11.0) – (12.8) – (12.8)Finance lease obligations – – – (0.1) – (1.1) (1.2) – (1.2)Redeemable Preference C Shares – – – – (7.2) – (7.2) – (7.2)Other financial liabilities – – (56.2) (10.7) (2.4) (8.6) (77.9) – (77.9)



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24 Financial instruments and risk management continuedCredit riskThe Group considers its maximum exposure to credit risk to be as follows:

Other Total Assets held Energy Lifting Dynacast Industrial Central MVC continuing for sale Total

£m £m £m £m £m £m £m £m £m

31 December 2009Financial assetsCash and cash equivalents – – – – 147.5 – 147.5 – 147.5Trade receivables 72.0 60.0 34.1 23.0 0.4 – 189.5 – 189.5Derivative financial assets 0.6 0.4 0.5 – 1.1 – 2.6 – 2.6

31 December 2008Financial assetsCash and cash equivalents – – – – 165.7 – 165.7 2.0 167.7Trade receivables 117.3 70.2 39.7 57.2 0.3 – 284.7 27.3 312.0Derivative financial assets 0.5 0.4 0.1 2.1 – – 3.1 – 3.1

1 January 2008 Financial assetsCash and cash equivalents – – 28.8 4.8 26.6 (13.8) 46.4 – 46.4Trade receivables – – 42.8 8.3 0.1 9.7 60.9 – 60.9Derivative financial assets – – 0.7 (0.4) 0.1 – 0.4 – 0.4

The Group’s principal financial assets are cash and short-term deposits, trade receivables and derivative financial assets which represent the Group’s maximum exposure to credit risk in relation to financial assets.

The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the Balance Sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and their assessment of the current economic environment. Note 16 provides further details of the Group’s policies regarding the recovery of trade receivables.

Liquidity riskThe Group’s policy for managing liquidity rate risk is set out in the Finance Director’s review.

Fair valuesThe Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.



24 Financial instruments and risk management continuedForeign exchange contractsAs at 31 December 2009, the Group held foreign exchange forward contracts to mitigate expected exchange fluctuations on cash flows on sales to customers and purchases from suppliers. These instruments operate as cash flow hedges unless the amounts involved are small. The terms of the material currency pairs with total principals in excess of Sterling £1 million equivalent are as follows:

31 December 31 December 31 December 31 December 2009 2009 2008 2008 Selling currency Average hedged Selling currency Average hedged

millions rate millions rate

Sell Australian Dollar/Buy Sterling AUD 4.6 GBP/AUD 1.90 – –Sell Canadian Dollar/Buy US Dollar CAD 5.7 USD/CAD 1.09 – –Sell Czech Koruna/Buy Euro CZK 84.1 EUR/CZK 27.90 – –Sell Euro/Buy Czech Koruna EUR 52.5 EUR/CZK 26.37 – –Sell Euro/Buy Sterling EUR 34.0 GBP/EUR 1.13 EUR 14.5 GBP/EUR 1.36Sell Norwegian Krone/Buy Sterling NOK 15.9 GBP/NOK 9.57 NOK 22.2 GBP/NOK 10.45Sell Polish Zloty/Buy Sterling PLN 19.4 GBP/PLN 4.68 – –Sell Sterling/Buy Czech Koruna GBP 19.6 GBP/CZK 29.71 GBP 20.2 GBP/CZK 28.45Sell Sterling/Buy Euro GBP 25.3 GBP/EUR 1.11 – –Sell Sterling /Buy US Dollar GBP 24.1 GBP/USD 1.64 – –Sell US Dollar/Buy Euro USD 6.2 USD/EUR 0.68 USD 5.7 USD/EUR 0.69Sell US Dollar/Buy Sterling USD 64.6 GBP/USD 1.64 USD 105.9 GBP/USD 1.84Sell US Dollar/Buy Singapore Dollar USD 11.4 USD/SGD 1.43 USD 35.8 USD/SGD 1.40Sell US Dollar/Buy Canadian Dollar USD 15.7 USD/CAD 1.08 USD 37.2 USD/CAD 1.14Sell US Dollar/Buy Chinese Renminbi USD 6.1 USD/RMB 6.77 USD 4.3 USD/RMB 6.75Sell US Dollar/Buy Korean Won USD 2.0 USD/KRW 1,184.30 – –Sell Danish Krone/Buy Sterling – – DKK 27.9 GBP/DKK 9.23Sell Euro/Buy Danish Krone – – EUR 54.2 EUR/DKK 7.48Sell Hong Kong Dollar/Buy Danish Krone – – HKD 42.2 EUR/HKD 1.53Sell Norwegian Krone/Buy Danish Krone – – NOK 49.7 DKK/NOK 1.10Sell Sterling/ Buy Danish Krone – – GBP 1.6 GBP/DKK 9.77Sell UAE Dirham/Buy Sterling – – AED 7.5 GBP/AED 6.65Sell US Dollar/Buy Danish Krone – – USD 35.1 USD/DKK 5.25Sell US Dollar/Buy Malaysian Ringgit – – USD 4.7 USD/MYR 3.32

The foreign exchange contracts all mature between January 2010 and November 2011. The fair value of the contracts at 31 December 2009 was a net liability of £1.2 million (2008: £20.2 million).

As at 31 December 2009, the Group held a single copper swap contract that was designated as a cash flow hedge. This swap contract locks the Group into fixed copper prices to protect against fluctuations in the market price of copper. The terms of the contract are:

Commodity swaps Commodity Total quantity Maturity Pricing

Group pays Copper 25 tonnes 28 February 2010 Fixed price of US Dollar 4,613 per tonneGroup receives Copper 25 tonnes 28 February 2010 Average LME price for the month

The fair value of the contract at 31 December 2009 was nil (2008: liability of £2.0 million).

Hedge of net investments in foreign entitiesIncluded in interest-bearing loans at 31 December 2009 were the following amounts which were designated as hedges of net investments in the Group’s subsidiaries in Europe and the USA and were being used to reduce the exposure to foreign exchange risks.

Borrowings in local currency:

31 December 31 December 2009 2008

£m £m

US Dollar 374.1 469.8Euro 51.6 198.4


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24 Financial instruments and risk management continuedInterest rate sensitivity analysisA one percentage point rise in market interest rates for all currencies would decrease profit before tax by the following amounts assuming the net debt as at the Balance Sheet date was outstanding for the whole year:


£m £m

Sterling (0.1) (0.5)US Dollar (0.3) (4.3)Euro (0.2) (1.9)

(0.6) (6.7)

Interest rate risk managementThe Group’s policy for managing interest rate risk is set out in the Finance Director’s review.

In January 2009, the Group entered into a number of interest rate swaps to hedge $546.0 million of US Dollar denominated bank debt into fixed rates of interest. Under the terms of these swaps the Group will pay an average rate of 2.1% p.a. plus a 2.0% margin annually in arrears and receive 3 month US Dollar LIBOR plus 2.0% quarterly in arrears. These swaps all mature in January 2013. These interest rate swaps were overlaid with a number of basis swaps in April 2009. Under the terms of these basis swaps the Group pays 3 month US Dollar LIBOR quarterly in arrears and receives 1 month US Dollar LIBOR plus 0.3% monthly in arrears.

In April 2009, the Group also took out an interest rate swap to hedge €33.3 million of Euro denominated debt into fixed rates of interest. The swap is structured in a similar way to the US Dollar interest rate swaps with the Group paying 2.6% plus a 2.0% margin annually in arrears and receiving 3 month EURIBOR plus 2.0% quarterly in arrears. This swap matures in April 2013. A corresponding amount of debt drawn under the £750 million loan facility is matched with these swaps.

These interest rate swaps have been designated as cash flow hedges and were highly effective throughout 2009. The fair value of the contracts at 31 December 2009 was a net asset of £0.8 million (2008: nil).

Foreign currency riskThe Group’s policy for managing foreign currency risk is set out in the Finance Director’s review.

Foreign currency sensitivity analysisCurrency risks are defined by IFRS 7 as the risk that the fair value or future cash flows of a financial asset or liability will fluctuate because of changes in foreign exchange rates.

The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance Sheet date, illustrating the increase/(decrease) in Group operating profit caused by a 10 cent strengthening of the US Dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling compared to the year end spot rate. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:


£m £m

US Dollar 1.6 0.4 Euro 1.2 2.4 Czech Koruna 0.4 (0.6)

The following table details the (decrease)/increase in Group equity caused by a 10 cent strengthening of the US dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:


£m £m

US Dollar (0.4) (0.6)Euro (0.5) (1.4)Czech Koruna 0.1 0.4



24 Financial instruments and risk management continuedFair value measurements recognised in the Balance Sheet Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching the maturities of the contracts.

Commodity swaps are measured using quoted forward commodity prices.

Interest rate swap contracts are measured using yield curves derived from quoted interest rates. The fair value is shown below. Interest rate swaps are shown as non-current due to maturity dates in 2013. Basis swaps are shown as current due to having maturity dates in 2010.

31 December 31 December 31 December 31 December 31 December 31 December 2009 2009 2009 2008 2008 2008 Current Non-current Total Current Non-current Total £m £m £m £m £m £m

Derivative financial assetsForeign currency forward contracts 1.7 – 1.7 3.1 – 3.1Interest rate swaps 0.3 0.6 0.9 – – –

2.0 0.6 2.6 3.1 – 3.1

Derivative financial liabilitiesForeign currency forward contracts (2.8) (0.1) (2.9) (23.3) – (23.3)Commodity swaps – – – (2.0) – (2.0)Interest rate swaps – (0.1) (0.1) – – –

(2.8) (0.2) (3.0) (25.3) – (25.3)

In accordance with IFRS 7 all of the above are Level 2 instruments defined by the degree to which the fair value is observable. These are the only financial assets and liabilities measured at fair value within the Group. Level 2 fair value measurements are those derived from quoted prices (adjusted) in active markets for identical assets or liabilities.

25 Issued capital and reserves


Share capital £m £m £m

Authorised854,999,996 (31 December 2008: 754,999,996, 1 January 2008: 201,000,000) Ordinary Shares of 0.2p each 1.7 1.5 0.4267,330,058 (31 December 2008: 267,330,058, 1 January 2008: 267,330,058) Redeemable/Deferred Preference C Shares of 82.3p each 220.0 220.0 220.0Nil (31 December 2008: 50,000, 1 January 2008: 50,000) 2007 Incentive Shares of £1 each – 0.1 0.150,000 (31 December 2008: nil, 1 January 2008: nil) 2009 Incentive Shares of £1 each 0.1 – –

221.8 221.6 220.5

31 December 31 December 1 January 2009 2008 2008 £m £m £m

Allotted, called-up and fully paid497,586,779 (31 December 2008: 497,586,779, 1 January 2008: 133,665,029) Ordinary Shares of 0.2p each 1.0 1.0 0.2Nil (31 December 2008: nil, 1 January 2008: 70,489,480) Redeemable/Deferred Preference C Shares of 82.3p each – – 58.0Nil (31 December 2008: 50,000, 1 January 2008: 50,000) 2007 Incentive Shares of £1 each – 0.1 0.150,000 (31 December 2008: nil, 1 January 2008: nil) 2009 Incentive Shares of £1 each 0.1 – –

1.1 1.1 58.3

The rights of each class of share are described in the Directors’ report.


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25 Issued capital and reserves continuedOwn sharesThe Trustee of the Melrose PLC Employee Benefit Trust (“EBT”) holds 500 2009 Incentive Shares of £1 each (2008: 3,000 2007 Incentive Shares) in Melrose PLC. The Melrose PLC EBT also holds 25,279 Ordinary Shares of 0.2p each in Melrose PLC (2008: 25,279 Ordinary Shares) relating to unallocated shares following the crystallisation of the Original Incentive Scheme in August 2007. The FKI plc EBT holds 158,114 Ordinary Shares of 0.2p each in Melrose PLC (31 December 2008: 158,114 Ordinary Shares) which arose upon disposal of its FKI plc shares when FKI plc was acquired by Melrose PLC.

Hedging and translation reservesThe foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the foreign exchange movements of instruments designated as net investment hedges.

Hedging Translation reserve reserve Total

Hedging and translation reserves £m £m £m

Balance at 1 January 2008 0.4 1.8 2.2 Currency translation on net investments – 123.0 123.0 Losses on cash flow hedges (19.8) – (19.8)Taxation adjustments to equity 2.8 – 2.8 Transfer to Income Statement on cash flow hedges 1.1 – 1.1 Transfer to Income Statement on disposal of foreign operations – (8.9) (8.9)

Balance at 31 December 2008 (15.5) 115.9 100.4

Currency translation on net investments – (32.8) (32.8)Gains on cash flow hedges 5.9 – 5.9 Taxation adjustments to equity (2.3) – (2.3)Transfer to Income Statement on cash flow hedges 11.8 – 11.8 Transfer to Income Statement on disposal of foreign operations – (11.4) (11.4)

Balance at 31 December 2009 (0.1) 71.7 71.6

26 Cash flow statement

Restated(1)


£m £m

Reconciliation of operating profit to cash generated by continuing operationsHeadline(2) operating profit from continuing operations 149.7 96.6 Adjustments for:Depreciation of property, plant and equipment 32.7 20.0 Amortisation of computer software 0.9 0.5 Restructuring costs paid and decrease in other provisions (33.4) 4.2

Operating cash flows before movements in working capital 149.9 121.3 Decrease/(increase) in inventories 79.8 (22.1)Decrease in receivables 66.1 26.5 (Decrease)/increase in payables (65.8) 24.9

Cash generated by operations 230.0 150.6 Tax paid (3.4) (16.1)Interest paid (13.4) (32.6)Defined benefit pension contributions paid (32.0) (19.8)Incentive scheme payments (4.4) (2.3)

Net cash from operating activities from continuing operations 176.8 79.8




26 Cash flow statement continued

Restated(1)


£m £m

Cash flow from discontinued operationsCash generated from discontinued operations (2.0) 39.5 Tax received/(paid) 0.1 (0.1)Interest paid – (0.4)Defined benefit pension contributions paid (0.1) (0.2)

Net cash (used in)/from operating activities from discontinued operations (2.0) 38.8

Investments in joint ventures (0.2) –Interest received – 0.2 Purchase of property, plant and equipment (1.3) (4.0)Proceeds on disposal of property, plant and equipment 0.2 –

Net cash used in investing activities from discontinued operations (1.3) (3.8)

Repayments of obligations under finance leases – (0.6)

Net cash used in financing activities from discontinued operations – (0.6)


Net debt reconciliation

At Foreign Other At 31 December exchange non-cash 31 December 2008 Cash flow(1) difference Disposals movements 2009 £m £m £m £m £m £m

Cash 167.7 (67.6) (1.8) 49.2 – 147.5Debt due within one year (0.5) 0.5 – – (0.3) (0.3)Debt due after one year (709.1) 185.3 57.7 – (1.8) (467.9)Leases (1.2) 0.1 0.1 – – (1.0)

Net debt (543.1) 118.3 56.0 49.2 (2.1) (321.7)

(1) Includes £0.6 million of net cash disposed of within discontinued operations.

27 Commitments and contingenciesFuture total minimum lease payments under finance leases and hire purchase contracts were as follows:


£m £m

Amounts payable:Within one year 1.0 0.1After one year but within five years – 1.1

Total minimum lease payments 1.0 1.2Less amounts representing finance charges – –

1.0 1.2


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27 Commitments and contingencies continuedFuture total minimum rentals payable under non-cancellable operating leases as at 31 December 2009 were as follows:


£m £m

Amounts payable:Within one year 9.6 16.7After one year but within five years 22.9 42.8Over five years 17.5 12.8

50.0 72.3

Capital commitmentsAt 31 December 2009, there were commitments of £8.1 million (2008: £10.4 million) relating to the acquisition of new plant and machinery.

28 Related partiesTransactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

The Group did not enter into any significant transactions in the ordinary course of business with joint ventures during the current or prior year.

Sales to and purchases from related parties are priced at arms length transactions and generally are settled on 30 day terms.

Remuneration of key management personnelThe remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24: “Related party disclosures”. Further information about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration report on page 43.


£m £m

Short-term employee benefits 2.6 2.3Share-based payments 1.6 1.7

4.2 4.0

29 Post balance sheet eventsThere are no post balance sheet events which require disclosure.

30 Contingent liabilitiesAs a result of the acquisition of the Dynacast, McKechnie and FKI businesses, certain contingent legal, environmental and tax liabilities were identified. Whilst it is difficult to reasonably estimate the ultimate outcome of these claims, the Directors’ best estimate of the outcome of these claims has been included in the Balance Sheet.

The Group has contingent liabilities representing guarantees and contract bonds given in the ordinary course of business on behalf of trading subsidiaries. No losses are anticipated to arise on these contingent liabilities.


Independent auditors’ report – Company statements

Independent auditors’ report to the members of Melrose PLC on the Company financial statements We have audited the Company financial statements of Melrose PLC for the year ended 31 December 2009 which comprise the Balance Sheet and the related notes 1 to 14. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorsAs explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

Opinion on financial statementsIn our opinion the Company financial statements:

give a true and fair view of the state of the Company’s affairs as at 31 December 2009;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006In our opinion:

the part of the Directors’ Remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and

the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the Company financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or

the Company financial statements and the part of the Directors’ Remuneration report to be audited are not in agreement with the accounting records and returns; or

certain disclosures of Directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit.

Other mattersWe have reported separately on the Group financial statements of Melrose PLC for the year ended 31 December 2009.

Nicola Mitchell (Senior Statutory Auditor)for and on behalf of Deloitte LLPChartered Accountants and Statutory Auditors London, UK10 March 2010


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Company Balance Sheet for Melrose PLC


Notes £m £m

Fixed assetsInvestment in subsidiaries 3 884.9 884.9Tangible fixed assets 4 0.3 0.5Derivative financial instruments 5 0.6 –

885.8 885.4Current assetsDebtors 6 644.1 842.8Cash at bank and in hand 27.5 1.7Derivative financial instruments 5 0.2 –

671.8 844.5Creditors: amounts falling due within one yearCreditors 7 (250.9) (190.2)

(250.9) (190.2)

Net current assets 420.9 654.3

Total assets less current liabilities 1,306.7 1,539.7

Creditors: amounts falling due after more than one yearBank loans 7, 8 (467.4) (707.8)

Provision for liabilities and charges 9 (7.7) (0.2)

Net assets 831.6 831.7

Capital and reservesIssued share capital 10 1.1 1.1Share premium account 11 279.1 279.1Merger reserve 11 285.1 285.1Capital redemption reserve 11 220.1 220.1Retained earnings 11 45.4 46.3Hedging reserve 12 0.8 –

Shareholders’ funds 13 831.6 831.7

The financial statements were approved by the Board of Directors on 10 March 2010 and were signed on its behalf by

Geoffrey Martin Simon PeckhamGroup Finance Director Chief Operating Officer


Notes to the Company Balance Sheet

1 Significant accounting policiesBasis of accounting The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the historical cost convention, except for the revaluation of certain financial instruments which are recognised at fair value, and in accordance with applicable United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) and law.

The Company financial statements have been prepared on a going concern basis in accordance with the rationale set out in the Directors’ statement of going concern on page 34 of the Directors’ report.

The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the preceding year.

InvestmentsFixed asset investments in subsidiaries are shown at cost less provision for impairment.

For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured at the fair value of the consideration paid. Any premium is ignored.

Bank borrowingsInterest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including direct issue costs, are accounted for on an accruals basis in the Profit and Loss Account using the effective interest rate method and are added to the carrying amount of the investment to the extent that they are not settled in the period in which they arise.

Tangible fixed assetsTangible fixed assets are stated at cost less accumulated depreciation and any impairment in value. The initial cost of an asset comprises its purchase price or construction cost, and any costs directly attributable to bringing the asset into operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.

Depreciation of fixtures and fittings is calculated on a straight-line basis over the useful economic life of the assets being three to twelve years. The estimated useful lives are reviewed on an annual basis and, if necessary, changes in useful lives are accounted for prospectively.

The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets of cash-generating units are written down to their recoverable amount. The recoverable amount of tangible fixed assets is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs and allocated proportionately.

A tangible fixed asset is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Profit and Loss Account in the year the item is derecognised.

Cash and cash equivalentsCash and cash equivalents in the Balance Sheet comprise cash in hand and current balances with banks and similar institutions and short-term deposits which are readily convertible to cash and are subject to insignificant risks of changes in value.

Derivative financial instruments and hedgingDerivative financial instruments are initially recognised in the Balance Sheet at cost and subsequently remeasured to their fair value. The method of recognising the resulting gain or loss is dependent on whether the derivative contract is designed to hedge a specific risk and qualifies for hedge accounting. On the date a derivative contract is entered into, the Company designates derivatives which qualify as hedges for accounting purposes as either a) a hedge of the fair value of a recognised asset or liability (fair value hedge); b) a hedge of a forecast transaction or firm commitment (cash flow hedge); or c) a hedge of a net investment in a foreign operation.

Changes in the fair value of derivatives which are fair value hedges and that are highly effective are recognised in the Profit and Loss Account, along with any changes in the fair value of the hedged asset or liability that is attributable to the hedged risk. Changes in the fair value of derivatives in cash flow hedges are recognised in equity. Where the forecasted transaction or firm commitment results in the recognition of an asset or liability, the gains and losses previously included in equity are included in the initial measurement of the asset or liability. Otherwise, amounts recorded in equity are transferred to the Profit and Loss Account and classified as revenue or expense in the same period in which the forecasted transaction affects the Profit and Loss Account.

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. The Company hedges certain net investments in foreign operations with foreign currency borrowings. All foreign exchange gains or losses arising on translation are recognised in equity and included in cumulative translation differences.

Certain derivative instruments, while providing effective economic hedges under the Company’s policies, do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for cash flow hedge accounting are recognised immediately in the Profit and Loss Account.


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1 Significant accounting policies continuedShare-based paymentsThe Company has applied the requirements of FRS 20: “Share-based payments”. The Company issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non market-based vesting conditions.

Fair value is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

Cash flow statementThe Company has taken advantage of the exemption from preparing a Cash Flow Statement under the terms of FRS 1 (Revised): “Cash Flow Statements” because it prepares a Consolidated Statement of Cash Flows which is shown on page 49 of the Group financial statements.

TaxationCurrent tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the Balance Sheet date.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the Balance Sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.

Foreign currenciesMonetary assets and liabilities in foreign currencies are translated into Sterling at the rates of exchange ruling at the year end or, if appropriate, at the forward contract rate. Transactions in foreign currencies are translated into Sterling at the exchange rates ruling at the dates of the transactions or, if hedged, at the forward contract rate. Profits and losses on exchange arising in the normal course of trading and realised exchange differences arising on the conversion of foreign currency assets and liabilities are recognised within the Profit and Loss Account.

2 Profit for the yearAs permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own Profit and Loss Account for the year. Melrose PLC reported a profit for the financial year ended 31 December 2009 of £32.9 million (2008: £47.6 million). The Company paid dividends of £35.6 million (2008: £19.4 million) during the year.

The Company has unused tax losses of approximately £20.2 million (2008: £20.2 million) available to carry forward and offset against future profits. No deferred tax asset has been recognised in respect of these losses due to uncertainty over future taxable profits arising in the foreseeable future.

The estimated value of the deferred tax asset not recognised at 28% is £5.6 million (2008: £5.6 million).

The auditors’ remuneration for audit services to the Company is disclosed in note 7 to the consolidated financial statements.


Notes to the Company Balance Sheetcontinued

3 Investment in subsidiaries


Subsidiaries 884.9 884.9

884.9 884.9

The Company has investments in the following subsidiaries which principally affected the profits and net assets of the Group.

The following subsidiaries are directly owned by Melrose PLC.

Countryof Subsidiaries incorporation Principalactivity Holding%

Dynacast Canada UK Limited Great Britain Holding company 100Dynacast Holdings Limited Great Britain Holding company 100Dynacast International Limited Great Britain Holding company 100FKI plc Great Britain Holding company 100Melrose Management Resources Limited Great Britain Dormant 100Melrose Overseas Holdings Limited Great Britain Holding company 100Melrose UK Holdings Limited Great Britain Holding company 100Melrose UK1 Limited Great Britain Holding company 100Melrose UK2 Limited Great Britain Holding company 100Melrose UK3 Limited Great Britain Holding company 100Mozart Jersey No 2 Limited Jersey Holding company 100


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3 Investment in subsidiaries continuedOther significant indirectly wholly-owned subsidiaries of the Company (except as indicated) are:

Countryof EquitySubsidiaries incorporation Principalactivity interest%

EnergyBrush Electrical Machines Limited Great Britain Engineering company 100Brush HMA B.V Netherlands Engineering company 100Brush SEM s.r.o. Czech Republic Engineering company 100Brush Transformers Limited Great Britain Engineering company 100Harrington Generators International Limited Great Britain Engineering company 100Hawker Siddeley Switchgear Limited Great Britain Engineering company 100Marelli Motori SpA Italy Engineering company 100LiftingBridon-American Corporation USA Engineering company 100Bridon International Limited Great Britain Engineering company 100Bridon New Zealand Limited New Zealand Engineering company 100Crosby Europe N.V. Belgium Engineering company 100The Crosby Group Inc USA Engineering company 100DynacastDynacast (Singapore) PTE Limited Singapore Engineering company 100Dynacast Canada Inc Canada Engineering company 100Dynacast Deutschland GmbH and Co KG Germany Engineering company 100Dynacast Espana SA Spain Engineering company 97Dynacast Inc USA Engineering company 100Dynacast Österreich GmbH Austria Engineering company 100Shanghai Dynacast Automotive Casting Co Limited China Engineering company 100Shanghai Dynacast Electronic Components Limited China Engineering company 100Fishercast UK Limited Great Britain Engineering company 100Fishercast Limited Canada Engineering company 100Other IndustrialFKI Logistex Limited Great Britain Engineering company 100McKechnie Engineered Plastics Limited Great Britain Engineering company 100McKechnie Specialist Products Limited Great Britain Engineering company 100The Harris Waste Management Group Inc USA Engineering company 100Truth Hardware Corporation USA Engineering company 100Weber-Knapp Company USA Engineering company 100GroupFKI Engineering Limited Great Britain Holding company 100FKI Industries Canada Limited Canada Holding company 100FKI Industries Inc USA Holding company 100West House Insurance Limited Guernsey Insurance company 100McKechnie Management Services Limited Great Britain Management services company 100

4 Tangible fixed assets

Fixtures and fittings £m

Cost

At 1 January 2009 and 31 December 2009 0.7

DepreciationAt 1 January 2009 0.2Charge for the period 0.2

At 31 December 2009 0.4

Net book valueat 31 December 2009 0.3




5 Derivative financial instruments

31 December 31 December 31 December 31 December 31 December 31 December 2009 2009 2009 2008 2008 2008 Current Non-current Total Current Non-current Total £m £m £m £m £m £m

Fair value of derivative financial instrumentsInterest rate swaps 0.2 0.6 0.8 – – –

0.2 0.6 0.8 – – –

6 Debtors


Amounts falling due within one year:Amounts owed by Group undertakings 643.7 842.3Prepayments 0.4 0.5

644.1 842.8

7 Creditors


Amounts falling due within one year:Amounts owed to Group undertakings 234.6 185.0Accruals and other payables 16.3 5.2

250.9 190.2

Amounts falling due after more than one year:Bank loans 467.4 707.8

467.4 707.8

8 Bank loans

Effective 31 December 31 December interest rate Final 2009 2008 % maturity £m £m

Non-current bank loansDenominated in the following currencies:Bank borrowings – US Dollar loan LIBOR + 1.75% April 2013 374.1 469.8Bank borrowings – Euro loan EURIBOR + 1.75% April 2013 51.6 198.4Bank borrowings – Sterling loan LIBOR + 1.75% April 2013 50.0 50.0

475.7 718.2Unamortised finance costs (8.3) (10.4)

467.4 707.8

The bank borrowings are drawn under a five year multi-currency committed bank facility. A number of Group companies act as guarantors to this facility. Drawdowns bear interest at interbank rates of interest plus a margin of 1.75% as at 31 December 2009. This margin is determined by reference to the Group’s performance under its debt cover ratio covenant and ranges between 1.25% and 2.35%.

The interest rate re-pricing profile of financial liabilities, after taking into account hedging interest rate derivatives, is described in note 24 of the Group financial statements.


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9 Provisions for liabilities and charges

Incentive scheme related £m

At 1 January 2009 0.2Additional provision in the year 7.5


Included above is £7.5 million relating to cash incentive schemes and £0.2 million relating to national insurance on incentive schemes. This provision is considered to be non-current.

10 Issued share capital


Share capital £m £m

Authorised854,999,996 (2008: 754,999,996) Ordinary Shares of 0.2p each 1.7 1.5267,330,058 (2008: 267,330,058) Redeemable/Deferred C Shares of 82.3p each 220.0 220.0Nil (2008: 50,000) 2007 Incentive Shares of £1 each – 0.150,000 (2008: nil) 2009 Incentive Shares of £1 each 0.1 –

221.8 221.6

Allotted, called-up and fully paid497,586,779 (2008: 497,586,779) Ordinary Shares of 0.2p each 1.0 1.0Nil (2008: nil) Redeemable/Deferred C Shares of 82.3p each – –Nil (2008: 50,000) 2007 Incentive Shares of £1 each – 0.150,000 (2008: nil) 2009 Incentive Shares of £1 each 0.1 –

1.1 1.1

The rights of each class of share in issue are described in the Directors’ report on pages 28 to 35.

OwnsharesThe Trustee of the Melrose PLC Employee Benefit Trust (“EBT”) holds 500 2009 Incentive Shares of £1 each (2008: 3,000 2007 Incentive Shares) in Melrose PLC. The Melrose PLC EBT also holds 25,279 Ordinary Shares of 0.2p each in Melrose PLC (2008: 25,279 Ordinary Shares) relating to unallocated shares following the crystallisation of the 2007 Incentive Scheme in August 2007. The FKI plc EBT holds 158,114 Ordinary Shares of 0.2p each in Melrose PLC (2008: 158,114 Ordinary Shares) which arose upon disposal of its FKI plc shares when FKI plc was acquired by Melrose PLC.



11 Reserves

Share Capital premium Merger redemption Retained account reserve reserve earnings

Reserves £m £m £m £m

At 1 January 2008 – 37.0 154.6 23.7Issue of “offer and placement” Ordinary Shares 279.1 – – –Acquisition of FKI – 248.1 – –Preference C Shares redeemed – – 65.5 –Dividend paid – – – (19.4)Return of capital – – – (7.4)Profit for the year – – – 47.6Credit to equity for equity-settled share-based payments – – – 1.8

At 31 December 2008 279.1 285.1 220.1 46.3Dividend paid – – – (35.6)Profit for the year – – – 32.9Credit to equity for equity-settled share-based payments – – – 1.8

At 31 December 2009 279.1 285.1 220.1 45.4

Details of share-based payments are given in note 22 to the Group accounts.

12 Hedging reserve

£m

At 1 January 2008 0.2Transfer to income (0.2)

At 31 December 2008 –Fair value of derivative financial instruments 0.8


13 Reconciliation of movements in shareholders’ funds

£m

At 1 January 2008 273.8Dividends paid (19.4)Issue of “offer and placement” Ordinary Shares 279.7Acquisition of FKI plc 248.4Profit for the year 47.6Decrease in hedging reserve (0.2)Credit to equity for equity-settled share-based payments 1.8

At 31 December 2008 831.7Dividends paid (35.6)Profit for the year 32.9Increase in hedging reserve 0.8Credit to equity for equity-settled share-based payments 1.8


14 Related party transactionsIn accordance with FRS 8: “Related party transactions” the Company has chosen not to disclose intercompany balances and transactions in the year.


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Notice of Annual General Meeting

If you have sold or otherwise transferred all of your shares in Melrose PLC you should send this document as soon as possible to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for delivery to the purchaser or transferee.

Notice is hereby given that the seventh Annual General Meeting of the Company will be held at Barber-Surgeons’ Hall, Monkwell Square, Wood Street, London, EC2Y 5BL at 11.00am on 13 May 2010 for the following purposes. Resolutions 1 to 7 will be proposed as ordinary resolutions and resolutions 8 to 11 as special resolutions. Resolutions 7 to 11 are special business as defined under the Company’s Articles of Association.

Ordinary resolutions1. To receive the Company’s audited financial statements for the financial

year ended 31 December 2009, together with the Directors’ report and the auditors’ report on those financial statements.

2. To approve the Directors’ Remuneration report contained in the Company’s Annual Report and financial statements for the year ended 31 December 2009.

3. To re-elect Mr David Roper, who retires by rotation, as a Director of the Company.

4. To elect Mr Miles Templeman, who has been re-appointed as a Director since the last Annual General Meeting, as a Director of the Company.

5. To elect Mr John Grant, who has been re-appointed as a Director since the last Annual General Meeting, as a Director of the Company.

6. To re-appoint Deloitte LLP as auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next Annual General Meeting of the Company at which accounts are laid and to authorise the Directors to determine their remuneration.

7. That, in substitution for all existing authorities, the Directors be generally and unconditionally authorised to exercise all the powers of the Company to allot shares in the Company and grant rights to subscribe for, or to convert any security into, shares in the Company:

(A) up to an aggregate nominal amount of £331,724; and

(B) comprising equity securities (as defined in section 560(1) of the Companies Act 2006 (the “Act”)) up to an aggregate nominal amount of £663,449 (such amount to be reduced by the aggregate nominal amount of any allotments or grants made under paragraph (A) of this resolution 7) in connection with an offer by way of a rights issue:

(i) to Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and

(ii) to holders of other equity securities as required by the rights of those securities or, subject to such rights, as the Directors otherwise consider necessary,

and so that the Directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter,

such authorities to apply until the end of the Company’s next Annual General Meeting after this resolution is passed (or, if earlier, until the close of business on 30 June 2011) but, in each case, so that the Company may make offers and enter into agreements before the authority expires which would, or might, require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after the authority expires and the Directors may allot shares or grant rights under any such offer or agreement as if the authority had not expired.

Special resolutions8. That, in substitution for all existing powers and subject to the

passing of resolution 7, the Directors be generally empowered to allot equity securities (as defined in the Act) for cash pursuant to the authority granted by resolution 7 and/or to sell ordinary shares of 0.2 pence each in the capital of the Company (“Ordinary Shares”) held by the Company as treasury shares for cash in each case free of the restriction in section 561(1) of the Act, such power to be limited:

(A) to the allotment of equity securities and sale of treasury shares for cash in connection with an offer of equity securities (but in the case of an allotment pursuant to the authority granted by paragraph (B) of resolution 7, such power shall be limited to the allotment of equity securities in connection with an offer by way of a rights issue only):

(i) to Ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and

(ii) to holders of other equity securities, as required by the rights of those securities or, subject to such rights, as the Directors otherwise consider necessary,

and so that the Directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter; and

(B) to the allotment (otherwise than in the circumstances set out in paragraph (A) of this resolution 8) of equity securities pursuant to the authority granted by paragraph (A) of resolution 7 and/or the sale of treasury shares for cash up to a nominal amount of £49,758,

such power to apply until the end of the Company’s next Annual General Meeting after this resolution is passed (or, if earlier, until the close of business on 30 June 2011) but so that the Company may make offers and enter into agreements before the power expires which would, or might, require equity securities to be allotted (and treasury shares to be sold) after the power expires and the Directors may allot equity securities (and sell treasury shares) under any such offer or agreement as if the power had not expired.

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT AS TO THE ACTION YOU SHOULD TAKE, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK, SOLICITOR, ACCOUNTANT, FUND MANAGER OR OTHER APPROPRIATE INDEPENDENT FINANCIAL ADVISOR.


9. That the Company be generally and unconditionally authorised to make one or more market purchases (within the meaning of section 693 of the Act) of Ordinary Shares provided that:

(a) the maximum aggregate number of Ordinary Shares authorised to be purchased is 49,758,677 (representing 10% of the issued Ordinary Share capital);

(b) the minimum price which may be paid for an Ordinary Share is 0.2 pence;

(c) the maximum price which may be paid for an Ordinary Share is not more than the higher of:

(i) 105 per cent of the average of the middle market quotation for an Ordinary Share as derived from the London Stock Exchange plc’s Daily Official List for the five business days immediately preceding the day on which the Ordinary Share is purchased; and

(ii) the higher of the price of the last independent trade and the highest current independent bid on the trading venue where the purchase is carried out,

in each case, exclusive of expenses;

(d) this authority will expire at the end of the next Annual General Meeting of the Company following the passing of this resolution (or, if earlier, at the close of business on 30 June 2011);

(e) the Company may make a contract to purchase Ordinary Shares under this authority before expiry of the authority which will or may be executed wholly or partly after the expiry of that authority, and may make a purchase of Ordinary Shares in pursuance of any such contract; and

(f) any Ordinary Shares purchased pursuant to this authority may either be held as treasury shares or cancelled by the Company, depending on which course of action is considered by the Directors to be in the best interests of shareholders at the time.

10. That:

(A) the Articles of Association of the Company be amended by deleting all the provisions of the Company’s Memorandum of Association which, by virtue of section 28 of the Act, are treated as provisions of the Company’s Articles of Association; and

(B) the Articles of Association produced to the meeting and initialled by the chairman of the meeting for the purpose of identification be adopted as the Articles of Association of the Company in substitution for, and to the exclusion of, the existing Articles of Association.

11. That a general meeting other than an Annual General Meeting may be called on not less than 14 clear days’ notice.

By order of the Board Registered office Precision House Garry Barnes Arden RoadCompany Secretary Alcester7 April 2010 B49 6HN

Notes1. The holders of Ordinary Shares and 2009 Incentive Shares in the

Company are entitled to attend the Annual General Meeting, but only holders of Ordinary Shares are entitled to vote. A member entitled to attend and vote may appoint a proxy to exercise all or any of its rights to attend, speak and vote at a general meeting of the Company. Such a member may appoint more than one proxy, provided that each proxy is appointed to exercise the rights attached to different shares. A proxy need not be a member of the Company.

2. A form of proxy is enclosed with this notice. To be effective, a form of proxy must be completed and returned, together with any power of attorney or authority under which it is completed or a certified copy of such power or authority, so that it is received by the Company’s registrars at the address specified on the form of proxy not less than 48 hours (excluding any part of a day that is not a working day) before the time for holding the meeting. Returning a completed form of proxy will not preclude a member from attending the meeting and voting in person.

3. Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 (the “Act”) to enjoy information rights (a “Nominated Person”) may, under an agreement between him and the shareholder by whom he was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the Annual General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights. The statement of the rights of shareholders in relation to the appointment of proxies in notes 1 and 2 above does not apply to Nominated Persons. The rights described in notes 1 and 2 can only be exercised by shareholders of the Company.

4. To be entitled to attend and vote at the Annual General Meeting (and for the purposes of the determination by the Company of the number of votes they may cast), members must be entered on the Company’s register of members by 6.00pm on 11 May 2010 (or, in the event of an adjournment, on the date which is two days before the time of the adjourned meeting). Changes to entries on the register of members after this time shall be disregarded in determining the rights of any person to attend or vote at the meeting.

5. As at 7 April 2010 (being the last business day prior to the publication of this notice) the Company’s issued share capital consists of 497,586,779 Ordinary Shares, carrying one vote each, and 50,000 2009 Incentive Shares, which do not carry votes. Therefore, the total voting rights in the Company as at 7 April 2010 are 497,586,779.

6. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.

Notice of Annual General Meeting continued


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7. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications, and must contain the information required for such instruction, as described in the CREST Manual (available via www.euroclear.com/CREST). The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA19) by 11.00am on 11 May 2010. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.

8. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST Personal Member, or sponsored member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.

9. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.

10. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares.

11. Under section 527 of the Act members meeting the threshold requirements set out in that section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the Annual General Meeting; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Act. The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Act. Where the Company is required to place a statement on a website under section 527 of the Act, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the Annual General Meeting includes any statement that the Company has been required under section 527 of the Act to publish on a website.

12. Any member attending the meeting has the right to ask questions. The Company must answer any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered.

13. A copy of this notice, and other information required by section 311A of the Act, can be found at www.melroseplc.net.

14. You may not use any electronic address provided in either this Notice of Annual General Meeting or any related documents (including the Proxy Form) to communicate with the Company for any purposes other than those expressly stated.

15. The following documents will be available for inspection at the Company’s registered office during normal business hours (Saturdays, Sundays and public holidays excepted) from the date of this notice until the date of the Annual General Meeting and at the place of the Annual General Meeting for 15 minutes prior to and during the meeting:

(a) copies of all service agreements under which Directors of the Company are employed by the Company or any subsidiaries;

(b) a copy of the terms of appointment of the non-executive Directors of the Company; and

(c) a copy of the proposed new Articles of Association of the Company, and a copy of the existing Memorandum and Articles marked to show the changes being proposed in resolution 10.


Explanatory notes on the principal changes to the Company’s Articles of Association1. The Company’s objects

The provisions regulating the operations of the Company are currently set out in the Company’s Memorandum and its current Articles of Association (the “Current Articles”). The Company’s Memorandum contains, among other things, the objects clause which sets out the wide scope of the activities the Company is authorised to undertake.

The Companies Act 2006 significantly reduces the constitutional significance of a company’s memorandum and provides that a memorandum will record only the names of subscribers and the number of shares each subscriber has agreed to take in the company. Under the Companies Act 2006, for companies in existence at 1 October 2009, the objects clause and all other provisions which are contained in a company’s memorandum are deemed to be contained in the company’s articles of association. The company can remove these provisions by special resolution.

Further, the Companies Act 2006 states that unless a company’s articles provide otherwise, its objects are unrestricted. This abolishes the need for companies to have objects clauses. For this reason the Company is proposing to remove its objects clause together with all other provisions of its Memorandum which, by virtue of the Companies Act 2006, are treated as forming part of the Company’s Articles of Association as of 1 October 2009. Resolution 10 (A) confirms the removal of these provisions for the Company. As the effect of this resolution will be to remove the statement currently in the Company’s memorandum of association regarding limited liability, the proposed new articles of association of the Company (the “New Articles”) contain an express statement regarding the limited liability of shareholders.

2. Articles which duplicate statutory provisionsProvisions in the Current Articles which replicate provisions contained in the Companies Act 2006 are removed in the New Articles or amended to bring them into line with the Companies Act 2006.

3. Change of nameUnder the Companies Act 1985, a company could only change its name by special resolution. Under the Companies Act 2006, a company will be able to change its name by other means provided for by its articles. To take advantage of this provision, the New Articles enable the Directors to pass a resolution to change the Company’s name.

4. Authorised share capital and unissued sharesThe Companies Act 2006 abolishes the requirement for a company to have an authorised share capital and the New Articles reflect this. Directors will still be limited as to the number of shares they can allot because shareholder authority to allot shares continues to be required under the Companies Act 2006, save in respect of employee share schemes.

5. Redeemable sharesUnder the Companies Act 1985, if a company wished to issue redeemable shares, it had to include in its articles the terms and manner of redemption. The Companies Act 2006 enables directors to determine such matters instead provided they are so authorised by the articles. The New Articles contain such an authorisation. The Company has no plans to issue redeemable shares but if it did so the Directors would need shareholders’ authority to issue new shares in the usual way.

6. Authority to purchase own shares, consolidate and sub-divide shares, and reduce share capitalUnder the Companies Act 1985, a company required specific enabling provisions in its articles to purchase its own shares, to consolidate or sub-divide its shares and to reduce its share capital or other undistributable reserves, as well as shareholder authority to undertake the relevant action. The Current Articles include these enabling provisions. Under the Companies Act 2006 a company will only require shareholder authority to do any of these things and it will no longer be necessary for articles to contain enabling provisions. Accordingly the relevant enabling provisions have been removed in the New Articles.

7. Use of sealsUnder the Companies Act 1985, a company required authority in its articles to have an official seal for use abroad. Under the Companies Act 2006, such authority will no longer be required. Accordingly, the relevant authorisation has been removed in the New Articles.

8. Suspension of registration of share transfersThe Current Articles permit the Directors to suspend the registration of transfers. Under the Companies Act 2006 share transfers must be registered as soon as practicable. The power in the Current Articles to suspend the registration of transfers is inconsistent with this requirement. Accordingly, this power has been removed in the New Articles.

9. Voting by proxies on a show of handsThe Shareholders’ Rights Regulations have amended the Companies Act 2006 so that it now provides that each proxy appointed by a member has one vote on a show of hands unless the proxy is appointed by more than one member, in which case the proxy has one vote for and one vote against if the proxy has been instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution. The New Articles reflect these changes.

10. Chairman’s casting voteThe Current Articles give the Chairman a casting vote in the event of an equality of votes in a general meeting. This is no longer permitted under the Companies Act 2006 and New Articles reflect this.

Notice of Annual General Meeting continued

Company and shareholder information

As at 31 December 2009 there were 7,898 holders of Ordinary Shares in the Company. Their shareholdings are analysed as follows:

Percentage of Number of total number Number of Percentage of

Size of shareholding shareholders of shareholders Ordinary Shares Ordinary Shares

1 – 5,000 7,095 89.83 5,129,633 1.035,001 – 50,000 459 5.81 5,944,521 1.1950,001 – 100,000 56 0.71 4,011,549 0.81100,001 – 500,000 145 1.84 38,035,052 7.64Over 500,000 143 1.81 444,466,024 89.33

Total 7,898 100.00 497,586,779 100.00

Financial calendar 2010

Ex-dividend date for second interim dividend 17 March 2010Record date for second interim dividend 19 March 2010Payment of second interim dividend 1 April 2010Annual General Meeting 13 May 2010Announcement of interim results August 2010Intended payment of interim dividend November 2010Preliminary announcement of 2010 results March 2011

Directors Registered office Legal advisorsChristopher Miller Precision House Clifford Chance LLP David Roper Arden Road 10 Upper Bank StreetSimon Peckham Alcester London E14 5JJGeoffrey Martin WarwickshireMiles Templeman B49 6HN BrokersPerry Crosthwaite InvestecJohn Grant Tel: +44 (0) 1789 761020 2 Gresham Street Fax: +44 (0) 1789 761057 London EC2V 7QP

J.P. Morgan CazenoveCompany Secretary Registered number 20 MoorgateGarry Barnes 4763064 London EC2R 6DA

Head office Bankers RegistrarsLeconfield House Lloyds TSB Bank PLC EquinitiCurzon Street Barclays Bank plc The CausewayLondon W1J 5JA Commerzbank AG Worthing HSBC Bank PLC West SussexTel: +44 (0) 20 7647 4500 J.P. Morgan PLC BN99 6DAFax: +44 (0) 20 7647 4501 The Royal Bank of Scotland plcwww.melroseplc.net

Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ

Shareholders can view up to date information about their shareholding and register to receive future electronic communications from the Company by visiting the shareholders’ website at www.shareview.co.uk


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104 Melrose PLC Annual Report 2009104 Melrose PLC Annual Report 2009

Melrose PLC Annual Report 2009

Contents

01 Financial highlights02 Group at a glance06 Chairman’s statement08 Chief Executive’s review 10 Energy business review 12 Lifting business review 14 Dynacast business review 16 Other Industrial business review19 Finance Director’s review26 Board of Directors28 Directors’ report

36 Corporate Governance report40 Remuneration report44 Statement of Directors’

responsibilities

45 Financial contents46 Independent auditors’ report –

consolidated statements47 Consolidated Income Statement48 Consolidated Statement

of Comprehensive Income49 Consolidated Statement

of Cash Flows50 Consolidated Balance Sheet51 Consolidated Statement of Changes

in Equity52 Notes to the accounts90 Independent auditors’ report –

Company statements91 Company Balance Sheet for

Melrose PLC92 Notes to the Company

Balance Sheet

99 Notice of Annual General Meeting103Company and shareholder

information

Businessperformance

Governance

Shareholderinformation

Financials

£1,298.5mRevenue(Year ended 31 December 2009)

16.6pHeadline(1)basicearningspershare(Year ended 31 December 2009)

£149.7mHeadline(1)operatingprofit(Year ended 31 December 2009)

Revenuebygeographiclocation(%)

1Europe 60%2NorthAmerica 31%3Asia 7%4Restofworld 2%

Netdebt(£m)

All information presented above relates to the Group’s continuing business.


(2) The ratio of net debt to headline operating profit before depreciation and amortisation.

2

1

3 4

31 Dec2008

30 June2009

31 Dec2009

543

416

322

2.65x 2.13x 1.76xLeverage(2)

Designed and produced by Merchantwww.merchant.co.ukPrinted by St Ives Westerham Press


Melrose P

LC A

nnual Report 2009


Making acquisitionsDriving performanceRealising value

www.melroseplc.net

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Melrose PLC · 90 Independent auditors’ report – Company statements 91 Company Balance Sheet...

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